Doing Business. A Practical Guide. casselsbrock.com. Canada. Dispute Resolution. Foreign Investment. Aboriginal. Securities and Corporate Finance

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1 About Canada Dispute Resolution Forms of Business Organization Aboriginal Law Competition Law Real Estate Securities and Corporate Finance Foreign Investment Public- Private Partnerships Restructuring and insolvency Government Relations Consumer Protection Intellectual Property Privacy Law Taxation Employment Law Financing a Business Operation in Canada Doing Business In Canada A Practical Guide casselsbrock.com

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3 TABLE OF CONTENTS Introduction and Disclaimer About Canada 1 Aboriginal Law 2 Competition Law 3 Dispute Resolution 4 Employment Law 5 Financing a Business Operation in Canada 6 Foreign Investment 7 Forms of Business Organization 8 Government Relations 9 Intellectual Property 10 Privacy Law 11 Public-Private Partnerships 12 Real Estate 13 Restructuring and Insolvency 14 Securities and Corporate Finance 15 Taxation 16 Consumer Protection

4 Introduction and Disclaimer The progressive global liberalization of international trade and investment has generated new opportunities to expand business activities across national borders. Canada has been at the forefront of this initiative both globally through participation in the World Trade Organization and bilaterally through its participation in the North American Free Trade Agreement and bilateral free trade agreements with each of Costa Rica, Chile, Panama, Israel, South Korea, Columbia, Jordan, Peru and the European Free Trade Association. Canada is also a party to 34 bilateral investment treaties, the last of which was signed with China in Doing Business in Canada provides a general overview of key legal aspects of the Canadian business environment. It has been prepared to assist anyone who is considering establishing or acquiring a business in Canada. The intent of this publication is to provide a practical reference to doing business in Canada. The information contained herein should not be taken as legal advice, and is not an exhaustive analysis of all provisions of Canadian law with which your business may be required to comply. Readers are urged to consult legal counsel for advice on specific questions or issues. The information in this publication is current as of September 2014 unless otherwise specified. An electronic copy of the Cassels Brock Doing Business in Canada publication can be found on our website ( With more than 200 lawyers based in Toronto and Vancouver, Cassels Brock has one of the largest business law practices in Canada. We help domestic and foreign-based multinational, national and mid-market entities seize business opportunities here and around the world. Intro.1 Doing Business In Canada: Introduction and Disclaimer

5 About Canada Who Makes the Laws in Canada? What is Canada s Legal System? How Are Disputes Resolved in Canada s Legal System? Who Makes the Laws in Canada? Canada has a parliamentary system of government. The political party that elects the greatest number of members to the legislative body (federally, the House of Commons and provincially, the Legislature) is invited to form the government of the day. The federal Prime Minister and the provincial Premiers (the respective heads of the provincial governments) are elected by members of the political parties they represent. In each case, the cabinet is composed of elected members, and in some cases at the federal level, members of the Senate. Canada also has three Territories Yukon, Northwest Territories and Nunavut whose powers are delegated to them by the federal government. While the Premier of Yukon is elected in the same way that the provincial premiers are elected, the Premiers of Northwest Territories and Nunavut are selected from within the non-partisan elected territorial councils. Special arrangements are also in place for aboriginal peoples in different parts of the country. Indian bands, for instance, have jurisdiction over reserve lands. Canada is a federation with a written, constitutionally-based division of powers between the federal government and the provincial governments. Municipal governments derive their authority from the provincial governments. The powers of each level of government are subject to limitations imposed on them by the Charter of Rights and Freedoms which statute forms part of the Constitution. With limited exceptions, no legislative action (including all legislation and regulations) or administrative proceeding (rulings) may be exercised by either Parliament or a provincial Legislature in a manner that would adversely affect: The freedom of expression and association of individuals; Certain rights of individuals with respect to the enforcement of laws and regulations; and The equality of individuals under Canadian law. Canada has two official languages, English and French. All federal government services are available in both languages. Doing Business In Canada: About Canada AC.1

6 Federal Jurisdiction The federal government has authority to make laws in areas of general interest to the country as a whole. For example, the federal government passes laws on income tax, banking, regulation of interprovincial and international trade, bankruptcy and insolvency, intellectual property, immigration, customs duties and crime. Provincial Jurisdiction Provincial governments have authority to make laws in many areas including education, health and matters affecting real and personal property rights. For example, provincial governments pass laws relating to corporate securities, secured interests in personal property, the purchase and sale of interests in real estate, consumer protection, the incorporation of provincial companies, sales tax, insurance, the administration of the courts and the enforcement of judgments. Municipal Jurisdiction Municipal governments have authority to make laws that are local in nature. For example, municipal governments pass laws relating to licensing requirements for conducting business within the municipality and zoning requirements affecting the use of land within the municipality. Overlapping Jurisdiction This three-tiered system federal, provincial/territorial and municipal often creates situations where overlapping levels of government regulation may address a single issue. For example, all three levels of government have enacted (subject to constitutional limitations) legislation, regulations or directives intended to protect the natural environment and to impose responsibility for the cost of cleaning up environmental damage. As well, the federal government and each of the provinces have a Business Corporations Act. What is Canada s Legal System? All provinces except Québec and each territory have a legal system that is based on the English common law tradition. Québec has a civil law legal system based on the Napoleonic Code. In a sense, this gives Canadian lawyers an advantage: they are likely to be familiar with the underlying concepts of each of the two systems and can help bridge conflicts that arise in international transactions where both civil and common law legal systems play a role. The Common Law In Canada, there are many rules affecting the rights of parties conducting business in Canada. These rules derive from the judgments made every day in the courts of Canada. These rules form part of the law and are separate from statutes, regulations, by-laws and directives (the legislative enactments of federal, provincial/territorial and municipal governments). Over time, they are generally embodied in the practices observed by everyone and are referred to as the common law. The Québec Civil Code The province of Québec has enacted a Civil Code containing written rules that govern such matters as the law of commerce in the province. Québec courts then interpret the Civil Code on a case-bycase basis. AC.2 Doing Business In Canada: About Canada

7 How Are Disputes Resolved in Canada s Legal System? In Canada, there is a comprehensive court system for resolving commercial disputes. Commercial matters are usually heard in the federal courts or the superior courts of the provinces. The judiciary system is fully independent from all levels of government and is comprised of federal and provincial courts. Judges of the courts in Canada are not elected; rather, they are appointed for life (subject to removal for cause and certain age restrictions) by the government of the day. In addition to the court system, there are specialized independent tribunals which resolve disputes, including employment and municipal matters. In almost all cases, appeals are allowed from final decisions of courts or tribunals. Disputes may also be adjudicated through arbitration if the parties have agreed to do so. In arbitrations, the decision-maker is not a judge; rather, he or she is an independent person agreed upon by the parties or appointed by a judge. Each province has legislation that governs the arbitration process, if selected by the parties in their contract or otherwise. Doing Business In Canada: About Canada AC.3

8 Aboriginal Law Treaty Rights Definitions Consultation and Agreements Recent Legislative Initiatives Doing business in Canada often means dealing with Aboriginal law issues, due to the fact that Aboriginal Peoples in Canada have either unsettled legal claims and rights or court-affirmed legal claims and rights to and on large portions of the country. There are specific claims, which are those claims based on nonfulfillment of treaty obligations or misadministration of Indian monies or lands, and there are comprehensive claims, which are based on traditional land use. Businesses in the natural resources sector energy, forestry, mining and fishing are among those most affected by Aboriginal law issues, which naturally arise when developments or activities occur on lands subject to land claims or other Aboriginal or treaty rights. Case law relating to Aboriginal or treaty rights and interests is relatively new and still evolving; as such, awareness of current applicable laws is imperative to the success of a project. Treaty Rights As the Aboriginal and treaty rights of Aboriginal Peoples are recognized and affirmed in Section 35 of the Constitution Act, 1982, both the federal and provincial governments ( the Crown ) are obligated to act honourably when dealing with Aboriginal Peoples. This means that potential developments or activities on lands to which Aboriginal Peoples have claims or interests may be subject to a legally required consultation process with the impacted group of Aboriginal Peoples. Specifically, when the Crown is considering whether to make a decision that might adversely affect an Aboriginal or treaty right or interest, the Crown has a duty to consult, and, where appropriate, accommodate Aboriginal Peoples. The duty to consult and accommodate varies on a case-by-case basis, and each project does not require the same degree of consultation or accommodation. As one Crown decision can impact a number of different groups of Aboriginal Peoples with overlapping claims or interests, it is imperative that the consultation and consultation 1.1 Doing Business In Canada: Aboriginal Law

9 records are done properly, and that the relevant Aboriginal groups are meaningfully consulted. Failure to do so can result in, among other things, permits being delayed or challenged, community protests, investor relations problems or litigation for injunctions or damages. Definitions Following are the definitions of Aboriginal Peoples, treaty rights and Aboriginal rights under Canadian law. Aboriginal Peoples comprise three distinct groups: the First Nations (also known as Indians, a historical misnomer that has been nonetheless adopted by many members of this group), the Inuit and the Métis. Canada s federal Parliament assumed exclusive legislative jurisdiction over Indians and lands reserved for Indians, and enacted legislation including the Indian Act and the much more recent First Nations Fiscal Management Act, First Nations Land Management Act and Indian Oil and Gas Act. While First Nations and Inuit are under federal jurisdiction, the relationship between the Métis and Parliament will be determined by the Supreme Court of Canada ( SCC ) in late 2014 if leave is granted on a Federal Court of Appeal ruling from April 2014 that Métis are included in the phrase Indians and lands reserved for Indians. Treaty rights are the rights set out in historic and modern treaties. Much of northern Canada is covered by modern treaties, and a large portion of southern Canada is covered by some form of historic treaty. British Columbia is the only province that remains largely uncovered by treaties. Aboriginal rights are defined as cultural rights traditionally exercised by Aboriginal Peoples. These rights include the right to hunt, trap, fish and gather on the land in question, if not to the land itself where Aboriginal title is recognized. In June 2014 the SCC upheld the BC Supreme Court s 2007 decision to recognize Aboriginal title in a broader sense, not just as specific, intensely used sites ; as a result, both private and public entities are legally required to consult, and where appropriate, accommodate Aboriginal groups. This ruling establishes a precedent that has national implications and will have impacts on resource developments and major projects both within the declared Aboriginal title area as well as within those areas where Aboriginal rights, including title, are being asserted. Consultation and Agreements Although the consultation process with potentially impacted Aboriginal groups is the Crown s responsibility, the Crown is able to delegate some or all of the process to the project proponents who are seeking its approval to proceed. This is simply because the proponent has assessed the project s feasibility before applying, has the most current information, and has the most incentive to conduct a successful consultation. It is also routine for both federal and provincial governments to promote impact-benefit agreements, participation agreements or revenue- or tax-sharing agreements between project proponents and the relevant Aboriginal groups. Such agreements are often necessary to ensure that projects can proceed with greater certainty and that the legitimate concerns of the impacted Aboriginal groups are taken care of. Benefits most often brokered in these agreements include employment opportunities, education and training initiatives, and contracting and business opportunities for the impacted communities, as well as capacity-building initiatives and plans to mitigate environmental impacts for the duration of the project and after the project closes. Early and active engagement to explain the impacts of the project followed by listening to and understanding the relevant Aboriginal group s specific needs and goals and working out how best to meet them will result in a successful agreement. It will also assist in approval and Doing Business In Canada: Aboriginal Law 1.2

10 implementation of the project. Most Aboriginal groups are open to development on their lands as long as the community and community members have an opportunity to share in the benefits (in both the short- and long-term) and the lands are protected as well as possible for future generations. This balance is the most important consideration to most communities, so Aboriginal groups will often request third-party heritage and environmental assessments and studies to document the extent of Aboriginal interests and to better articulate the potential impact of proposed projects on these interests. Recent Legislative Initiatives Increasingly, Aboriginal groups are seeking ownership interests and long-term revenues for their communities, and many projects are located on reserve lands. These kinds of projects require efficient tax structures, as there are different types of reserve lands in Canada, and a number of different rules may apply. Further, federal laws do not adequately cover developments on reserve lands and this lack of clarity or certainty could result in problems for all parties. For now, project proponents, governments and Aboriginal groups wishing to get around this unclear or grey area in federal law are using the more recent legislative initiatives like the First Nations Commercial and Industrial Development Act, which was established in 2005 at the request of First Nations themselves. This Act was designed to address the regulatory gap that existed for large-scale developments that were planned or that were taking place on reserves under the Indian Act. It is expected that further developments such as increased use of the newer federal legislation dealing with more complex land development on reserve lands will assist all parties in developing more stable and responsive regulatory regimes to manage the increasingly more complex projects. These are just some of the more recent laws and general considerations for doing business in Canada. The bottom line is that to avoid project delays or problems, businesses require experienced legal counsel to guide them through the consultation and approval process, and to assist them with identifying and maximizing the potential for positive shared outcomes for these developments. 1.3 Doing Business In Canada: Aboriginal Law

11 Competition Law Merger Notification and Review What is a Merger? When is a Merger Notifiable? Notification Procedure and Substantive Review What Are Advance Ruling Certificates and No-Action Letters? What Are the Filing Fees? When is a Merger Subject to Substantive Review? What Are Possible Merger Remedies? Criminal Offences Reviewable Trade Practices Civil Actions In Canada, the federal Competition Act (the CA ) governs all aspects of competition law. Companies doing business in Canada should be aware that the CA: Provides comprehensive rules regarding substantive and procedural requirements applicable to mergers; Establishes criminal offences, the breach of which may lead to significant fines for companies and fines and/or imprisonment for individuals involved; Allows individuals to launch civil damages suits for breaches of the statute s criminal provisions; and Contains rules for reviewable practices that may be prohibited if such practices substantially prevent or lessen, or have an adverse effect on competition in a market in Canada. Merger Notification and Review Even if a transaction raises no substantive competition issues under the merger review provisions, absent an exemption (see Notification Procedure and Substantive Review below), parties to a merger that meets the notification thresholds must nevertheless comply with the filing and waiting period requirements of the pre-merger notification regime. Conversely, a merger that does not meet the notification thresholds may still be subject to review by the Commissioner of Competition (the Commissioner ) and an order of the Competition Tribunal (the Tribunal ) if it raises a substantive issue under the merger review provisions of the CA. Doing Business In Canada: Competition Law 2.1

12 What is a Merger? A merger is defined in the CA as any form of direct or indirect acquisition or establishment of control over or significant interest in all or part of a business. When is a Merger Notifiable? Parties must notify the Commissioner of a proposed merger if the transaction meets both of the following financial thresholds, each of which is indexed annually: Size of Transaction Threshold For an acquisition of assets of an operating business, where: The aggregate value of the Canadian assets being acquired exceeds $82 million; or The gross annual revenue from sales in or from Canada generated by the assets exceeds $82 million. For an acquisition of shares, where: The aggregate value of the Canadian assets owned by the corporation whose shares are being acquired (or a corporation controlled by that corporation) exceeds $82 million; or The gross annual revenue from sales in or from Canada of the corporation whose shares are being acquired (or a corporation controlled by that corporation) exceeds $82 million. Size of Parties Threshold For transactions involving either assets or shares, the parties to the transaction (and their affiliates) must have: Combined assets in Canada exceeding $400 million; or Combined gross annual revenues from sales in, from (export) or into (import) Canada exceeding $400 million. Additional Threshold for Share Acquisitions Even if both the size of transaction and size of parties thresholds are met, an acquisition of shares is notifiable only when a purchaser: Acquires 20% or more of the voting shares of a public company (or 50% or more, if it already owns 20% of shares); or 35% or more of the voting shares of a private company (or 50% or more, if it already owns 35% of shares). Notification Procedure and Substantive Review Parties must provide the Commissioner prescribed information about their business and that of their affiliates, principal suppliers and customers. Once the filings are certified complete, a mandatory 30-day waiting period thereafter can be extended by up to several months if the Commissioner requests additional, relevant information (a Supplementary Information Request or SIR ). This transaction cannot be closed until 30 days after compliance with the SIR, unless the Commissioner issues an Advanced Ruling Certificate ( ARC ) (see What Are Advance Ruling Certificates and No-Action Letters? below) or waives the waiting period. 2.2 Doing Business In Canada: Competition Law

13 If the Commissioner s review is not complete after the expiry of the applicable waiting period, the parties typically agree not to close until the investigation is complete. The Competition Bureau (the Bureau ) strives to complete its review of a proposed non-complex transaction (no competitive overlap or very low post-transaction market shares) within 14 days and a complex transaction (some, or significant competitive overlap) within 45 days (except where a SIR is issued). What Are Advance Ruling Certificates and No-Action Letters? The Commissioner may still challenge a transaction within one year after it has closed unless the Commissioner issues an ARC or a no-action letter ( NAL ). Where clearly satisfied that the merger raises no substantial issues, the Commissioner will issue an ARC. The ARC exempts the transaction from the notification provisions and bars the Commissioner from applying to the Tribunal under the merger provisions unless there is a material change in circumstances provided the transaction is substantially completed within one year after the ARC is issued. Usually, the Commissioner will issue a NAL, confirming that the transaction raises no substantive issues. The NAL preserves the Commissioner s right to challenge the transaction for one year from the date of closing. What Are the Filing Fees? The mandatory filing fee for all pre-merger notifications or requests for ARCs or NALs regardless of the size or complexity of the transaction is $50,000. Usually, either the purchaser pays the fee or the parties split it evenly. Where parties provide both a premerger notification filing and a request for an ARC or NAL, there is only one $50,000 fee. When is a Merger Subject to Substantive Review? Regardless of size, a merger will be subject to substantive review if it is likely to give rise to a substantial prevention or lessening of competition in a relevant market in Canada. Before challenging a transaction, the Commissioner may apply to the Tribunal for an order enjoining the parties from completing the transaction for an (extendable) period of up to 30 days to complete his or her inquiry. The Commissioner may also apply for an interim order when challenging a proposed transaction. What Are Possible Merger Remedies? The Tribunal may: (i) issue a (an) remedial order(s) where it finds, on a balance of probabilities, that a (proposed or actual) merger prevents or lessens, or is likely to prevent or lessen, competition substantially in a relevant market; (ii) order the parties not to proceed with a proposed merger; or (iii) order the dissolution of a completed merger or the divestiture of specific assets or shares. Criminal Offences The CA establishes several criminal offences that are investigated at the discretion of the Bureau and may then be prosecuted by the Attorney General for Canada. These offences can also serve as the basis for civil suits for damages, which are generally brought by way of class actions. Conspiracy Per se offence punishable by imprisonment for up to 14 years and/or a fine of up to $25 million; Competitor agreements are subject to civil review (see Reviewable Trade Practices below). Bid-rigging Per se offence punishable by imprisonment for up to 14 years and/or substantial fines. Doing Business In Canada: Competition Law 2.3

14 Misleading Advertising Criminal offence punishable by a fine of up to $10 million per count for the first offence by a corporation and up to $750,000 per count for the first offence by an individual; Civil offence (reserved for fraud or deliberate breaches of the CA) punishable by imprisonment for up to 14 years. Reviewable Trade Practices The Tribunal may prohibit certain legal trade practices where, on a balance of probabilities, they are found to substantially lessen (or have an adverse effect on) competition in a market in Canada. The Tribunal may issue a remedial prohibition order as well as levy Administrative Monetary Penalties (AMPs) under the CA s abuse of dominance provisions (see Abuse of Dominant Position below). Abuse of Dominant Position Punishable by a fine of up to $10 million for the first offence and a maximum of $15 million for subsequent offences. Agreements or Arrangements that Prevent or Lessen Competition Substantially May be subject to an order from the Tribunal rendering the agreement terminated or modified. Price Discrimination, Predatory Pricing and Promotional Allowances Addressed under the abuse of dominance provisions in the CA (see Abuse of Dominant Position above). Price Maintenance May be subject to a prohibition order by the Tribunal or a private civil action brought with leave of the Tribunal. Refusal to Deal May be subject to an order by the Tribunal requiring the supplier to supply the product. Exclusive Dealing and Tied Selling May be subject to proceedings brought in conjunction with abuse of dominant position proceedings. Market Restriction May be subject to a prohibition (or other) order by the Tribunal to restore or stimulate competition. Civil Actions Individuals who have suffered damages as a result of either an alleged violation of the criminal provisions in the CA or a breach of a Tribunal s order may launch civil suits generally brought by way of a class action to recover actual damages suffered, plus costs (US-style treble damage awards are not possible). 2.4 Doing Business In Canada: Competition Law

15 Dispute Resolution Canadian Courts Discovery Costs Class Actions Limitation Periods Other Things You Should Know Canadian Courts Canada s court system is divided into two separate jurisdictions: federal courts and provincial courts: i) Federal Courts The federal courts consist of the Federal Court and the Federal Court of Appeal. The Federal Court is the federal trial court and hears cases arising under federal law such as admiralty, intellectual property and immigration matters. The Federal Court also hears judicial review applications from federal tribunals. The Federal Court of Appeal hears appeals from the Federal Court and judicial review applications from certain federal tribunals, including the Canadian Radio-television and Telecommunications Commission (CRTC) and the Copyright Board. ii) Provincial Courts Like the federal courts, the court systems in each of the provinces are divided into different levels: (i) superior courts and provincial courts; (ii) divisional courts; and (iii) courts of appeal. The superior courts exercise plenary jurisdiction over civil matters. There are very few limits on the types of cases superior courts may hear. The names of the superior courts differ by province for historical reasons. In Ontario the superior court is called the Superior Court of Justice. In British Columbia it is called the Supreme Court. Doing Business In Canada: Dispute Resolution 3.1

16 The superior courts in most provinces also have a separate division for small claims cases. These courts hear cases where the claims at issue are below a certain threshold. In Ontario the threshold is $25,000. The Superior Court of Justice in Toronto also has a specialized division for commercial matters called the Commercial List. The Commercial List is a court of limited jurisdiction and hears only matters that fall into particular categories including cases involving the Bankruptcy and Insolvency Act; the Bank Act (relating to realizations and priority disputes); the Business Corporations Act and the Canada Business Corporations Act; the Companies Creditors Arrangement Act; the Personal Property Security Act; the Securities Act; and other commercial matters depending on the complexity of the case, including franchise matters and enforcement of commercial arbitrations. Generally, cases listed on the Commercial List are heard faster than those in the Superior Court of Justice, and a Commercial Judge with particular expertise remains seized of the litigation. The provincial courts, like the Ontario Court of Justice, are administered by the province and are presided over by judges who are appointed by the province. They determine regulatory offences and family law matters that do not involve divorce. Some provinces, including Ontario, also have a divisional court. A divisional court is an intermediate court that typically hears judicial review applications from administrative tribunals. It may also hear appeals in smaller matters and certain appeals from non-final decisions. In Ontario, the Divisional Court hears cases in panels of three judges that are chosen among judges of the Superior Court. The courts of appeal in a province hear appeals from decisions from the superior courts. The judges generally sit in panels of three, although they sometimes will sit in panels of five when an appeal raises matters of significant importance. iii) Supreme Court of Canada The Supreme Court of Canada is a court of general appellate jurisdiction. It is based in Ottawa, Ontario and hears appeals from both the courts of appeal in the provinces and the Federal Court of Appeal. The Supreme Court is comprised of nine justices: one chief justice and eight puisne justices. Most appeals to the Supreme Court require leave from the Supreme Court itself in order to review a decision of the court of appeal. The test for leave to appeal is normally based upon whether the issue in question raises matters of national importance. Discovery Discovery in Canada is limited compared to that in other countries. There is a positive onus on a party to produce all relevant documents in the party s possession, custody or control. Similarly, examinations for discovery (depositions) are limited in number. Generally, a party may only examine one person from each party to a proceeding. If a party wants to examine additional deponents, they must either obtain the consent of the other parties or seek permission from the court. Further, parties are not required to answer all questions in an examination. A lawyer may instruct their client not to answer a question if the lawyer believes the question is irrelevant, privileged or constitutes harassment. A party may challenge the propriety of a refusal to answer a question or provide documents by motion to the court, where the court will consider whether the information or document sought is relevant and whether the request is reasonable and proportionate. 3.2 Doing Business In Canada: Dispute Resolution

17 Costs The costs of litigation in Canada may be shifted from a successful litigant to the unsuccessful one what is commonly called a loser pays rule. This means that a losing party, whether on a motion or at trial, may be responsible to pay percent of the winning party s legal fees and the party s cost disbursements, in addition to their own legal fees. The decision to award costs is usually within a judge s discretion, and he or she may consider several factors, including the complexity of the matter, whether a reasonable offer to settle was made and rejected, and whether the opposing party took steps to delay or incur unreasonable costs in the litigation. The cost-shifting regime is meant to serve several purposes including to encourage settlement and to compensate the successful party for having to participate in the litigation process. Class Actions Class actions are procedures whereby one or more representative plaintiffs commence a civil action on behalf of a larger group. The purpose of a class action is to aggregate claims that have a common legal or factual basis and which are often too costly for an individual plaintiff to litigate. Canadian class action statutes are modeled closely on the US class action rules under Rule 23 of the Federal Rules of Civil Procedure which governs class actions in US federal courts. Most provinces in Canada have class action statutes. If a province doesn t have a class action statute, a plaintiff may bring an action under the general common law. There is no aggregating mechanism for class actions in Canada that are brought in different provinces. However, courts often coordinate cases to minimize the prospect of inconsistent findings. In all provinces, the proposed class claim must raise common issues that may be determined for the class as a whole, and the proceeding must be determined by the court to be a preferable procedure for the resolution of the claims of the representative plaintiffs and putative class members. Before a class action may proceed, the court must certify it as such. Although Canadian class action legislation has been explicitly drafted to make certification easier than in the US, Canadian courts (with the possible exception of Québec) have interpreted the legislation in a moderate fashion. Class actions have been commenced and certified in a range of circumstances, including investor misrepresentation, securities fraud, defective and dangerous products, franchising and standard form contracts. Limitation Periods The limitation period for a particular claim depends on the province in which the claim is to be heard and the nature of the claim. In Ontario, the general limitation period is two years from the date the facts giving rise to the claim occurred, or two years from the date on which a party knew or should have been aware of the facts that gave rise to the claim. However, there are also limitation periods that are significantly shorter. For example, now in Ontario, a party is required to serve notice of an action for libel in a newspaper or broadcast within six weeks of the publication and commence such an action within three months of becoming aware of the claim. There is other legislation which prescribes specific limitation periods for other causes of action and these must be considered carefully before commencing legal proceedings. Doing Business In Canada: Dispute Resolution 3.3

18 Other Things You Should Know Most commercial cases in Canada are heard by a judge and not a jury. Typically, for civil cases, only personal injury cases are heard by a jury. The professional rules of conduct for lawyers in Canada require that lawyers are considerate to their opponents. Sharp practice is prohibited. Thus it is rare for a party to be able to take advantage of a minor procedural misstep by their opponent without first advising them of the error. In Ontario, cases are not generally assigned to a particular judge by way of case management. However, some cases, usually complex ones, are subject to case management and will be heard by the same judge throughout the duration of the matter if a special request is made and granted by the court. 3.4 Doing Business In Canada: Dispute Resolution

19 Employment Law No At-Will Employment Employment Standards Legislation Pay Equity Legislation Human Rights Legislation Occupational Health and Safety Legislation Workplace Safety and Insurance Legislation The Unionized Workplace Privacy Working in Canada Employment law in Canada is a complex mix of contract, statute and the common law or, in the case of Québec, civil law. With the exception of federally regulated industries such as banks, telecommunications, railways and airlines, employment law in Canada is provincially regulated. While most provincial employment standards statutes share some common features, Canadian employers should be mindful of the differences and ensure that their policies, practices and contracts are compliant with the legislation of the province in which they are operating. No At-Will Employment The most profound difference between Canadian employment law and American employment law can be summarized in one sentence: In Canada, there is no such thing as at-will employment. Every employee who is terminated without just cause is entitled to notice of termination or pay in lieu of that notice. Where there is no contract of employment in place, the amount of notice to which an employee is entitled is determined with reference to the common law concept of reasonable notice of termination. Reasonable notice varies based on the age, length of employment, compensation and position of the affected employee. There is no set formula for determining reasonable notice of termination but it can be as much as one month per year of service, up to a generally recognized maximum of 24 months. Employers can satisfy this obligation via working notice or pay in lieu of such notice, at their option. Employers have the opportunity to limit the amount of notice of termination that is provided to their employees by having employees enter into a valid employment agreement that prescribes a particular notice period or severance entitlement that is equal to or greater than the minimums prescribed by applicable employment standards legislation but less than reasonable notice of termination. Such contracts must be carefully drafted and must be signed by the employee before Doing Business In Canada: Employment Law 4.1

20 that employee begins working in the role. Courts in Canada are loathe to enforce agreements that may be perceived to be unfair to employees. Our Courts have made several broad statements regarding the primacy of work in the life of the individual, the inherent imbalance of power between individuals and their employees and the duty that all employers have to administer the employment relationship in good faith. They consistently apply these principles to any litigation between an employer and its former employee. Employment Standards Legislation As noted above, each province in Canada has legislation that prescribes certain minimum entitlements for employees working in that province. It is important to understand that employees do not have the option of contracting out of these statutory minimums. Contracts or offer letters that purport to offer the employee less than their minimum statutory entitlements will be found to be void, even if the employee has signed off on the arrangement. A. Minimum Wage, Hours of Work and Overtime Each province has a minimum wage rate as well as overtime pay requirements. They also place limitations on the amount of hours that can be worked in a week. For example, Ontario s Employment Standards Act, 2000 (the ESA ) requires an employer to pay overtime wages at 1.5 times the employee s regular wage rate after an employee has worked more than 44 hours in a week. It is important to note that salaried employees are not automatically exempt from overtime entitlements. All employees are entitled to overtime, unless their role is managerial or they fall within certain regulated exemptions based on their profession. For example, accountants, information technology professionals and lawyers are all precluded from claiming overtime. Unpaid overtime has been a popular basis for attempted class actions in Canada, so it is wise to pay special attention to compliance with applicable regulations. In addition to overtime entitlements, there are limits on the number of hours employees can work in any given day or week. Employees are also entitled to have a certain amount of rest between scheduled shifts. The maximum number of daily and weekly hours of work varies from province to province. In Ontario, it is eight hours a day and 48 hours per week. Exemptions are available to employees who fall within certain prescribed classes or where the employer has applied to the Ministry of Labour for permission to have its employees work extended hours. B. Vacation and Holidays Employees in Canada are entitled to both vacation and paid statutory holidays. Statutory holidays are prescribed by legislation. Provinces typically prescribe between nine and eleven statutory holidays each year. Some provinces permit employers to direct employees to work on statutory holidays but others do not. It should also be noted that employees who work on a statutory holiday will typically be entitled to both holiday pay and premium pay, resulting in a wage rate of 2.5 times their normal rate of pay. Vacation entitlements are broken into two constituent elements: vacation time and vacation pay. Most provinces mandate at least two week of vacation time each year. Some provinces, such as British Columbia, provide additional weeks of vacation after the employee has achieved a certain seniority. Vacation pay is expressed as a percentage of the employee s wages. If an employee is entitled to two weeks annual vacation, the vacation pay obligation will be 4% of regular wages. Three weeks of vacation will be 6% of wages. A key compliance issue for employers is what kinds of compensation are included in wages. The term does not just refer to base salary but often includes such things as commission, overtime pay and non-discretionary bonuses. Employers who simply continue an employee s base salary during vacation and do not provide compensation for lost commission during that vacation may find themselves out of compliance with applicable employment standards legislation. 4.2 Doing Business In Canada: Employment Law

21 C. Protected Leaves of Absence All provinces in Canada provide employees with certain job-protected leaves of absence, including pregnancy and parental leave. Ontario s ESA provides 17 weeks of unpaid pregnancy leave to employees who have 13 weeks of service or more, as well as 35 weeks of unpaid parental leave for both men and women. Other leaves of absence vary by province but include leaves to attend to ill or dying family members, personal emergencies, organ donor procedures and reservist duties. All of these leaves are unpaid but the employee may be eligible to apply for benefits from the government Employment Insurance fund, depending upon the circumstances. Time spent on leave is considered to be active employment for the purposes of assessing all seniority-based rights. Employers are prohibited from reprisals against employees for making use of these statutory leaves. Reprisal can take many forms, but most commonly includes dismissal during or immediately following the leave of absence, or a failure to return the employee to his or her former role. Employees who believe that they have been reprised against have the option of making a complaint to the applicable Ministry of Labour. In Ontario, employees who can demonstrate that they have suffered reprisal at the hands of their employers are entitled to claim reinstatement to their former position. Employers must tread very carefully when making any changes to the terms and conditions of employment for an employee on leave. D. Termination and Severance As noted in our discussion regarding at-will employment, there are certain statutory minimums that must be satisfied in the event of a without cause termination. These minimums vary from province to province but generally range between one and eight weeks, depending on length of service. Ontario provides enhanced termination entitlements to employees who work for a company with an annual Ontario payroll in excess of $2.5 million and who have five or more years of service. Such employees can receive an additional five to 26 weeks of severance pay. It should also be noted that many provinces require employers to continue all benefits coverage for a period of time following termination. Pay Equity Legislation Certain provinces prohibit employers from discriminating between men and women in rates of pay for substantially the same work. Pay equity provisions under the ESA and Ontario s Pay Equity Act apply to all employers in the private sector in Ontario with 10 or more employees, and to all employers in the public sector. Ontario s Pay Equity Act provides that female job classes must receive the same rate of pay as male job classes where the work performed is of equal or comparable value. Human Rights Legislation Each of the provinces has legislation in place prohibiting discrimination and harassment on the basis of enumerated categories. Ontario s Human Rights Code prohibits discrimination on the basis of ancestry, race, ethnic origin, place of origin, citizenship, creed, colour, religion, sex, sexual orientation, marital status, family status, record of offences, disability and age. This prohibition applies to all aspects of the employment relationship, including hiring, discipline, promotion, work assignments and firing. Provincial commissions and tribunals may investigate and award damages for loss of income and other damages arising out of a discriminatory practice. They also have the discretion to order non-pecuniary remedies such as training, apologies or changes to workplace practices and policies. It should be noted that employers are not permitted to use mandatory retirement policies as they have been found to constitute age discrimination. Doing Business In Canada: Employment Law 4.3

22 Occupational Health and Safety Legislation Ontario s Occupational Health and Safety Act, and like legislation in the other provinces, provides comprehensive rules that impose duties on employers and employees in worker health and safety matters. Many provinces have included the prevention of and response to workplace violence and harassment as an employer obligation in their occupational health and safety regimes. Employers and supervisors have significant obligations under occupational health and safety legislation and can face hefty fines and even prison time for serious breaches of the legislation. It should be noted that occupational health and safety requirements apply to workers, not just employees. Independent contractors, agency and temporary employees and interns will all be protected by the legislation and should be included in all safety and training initiatives. Workplace Safety and Insurance Legislation Each province in Canada has created a provincial workplace insurance fund that provides employees who have been injured in the workplace with access to certain health care benefits and reimbursement for lost earnings. Participating employers contribute to an insurance fund based on the employer s claims history and the sector in which the employer operates. By way of example, an employer operating in the forestry industry will typically pay higher premiums than a retail operation. Injured employees who have recovered from their injuries generally have the right to return to the same or a similar job with their pre-injury employer. The Unionized Workplace Employees in Canada have the right to be members of a trade union. A union that becomes certified has the exclusive right to bargain collectively for all of its members and the employer must bargain with the union in good faith. Certifications in most, but not all, jurisdictions require a vote, but the time between the application and the vote is generally very short. Employer must not threaten or intimidate employees in the context of a union certification application or they may find themselves automatically certified for having committed unfair labour practices. Once certified, an employer remains so, even if it sells its business. In most circumstances, the purchaser will be required to recognize the union and honour any collective agreement in effect as a successor employer. Privacy Privacy law in Canadian employment law can be divided into two categories: statutory and common law. Some provinces, including BC, Alberta, Manitoba and Québec, have adopted privacy legislation that specifically regulates employers collection, use and disclosure of their employees personal information. Even where there is no privacy legislation, employers need to be mindful of an employee s reasonable expectations regarding the collection, use and disclosure of their personal information. These issues typically manifest themselves when the employer tries to secretly monitor or record an employee s activities, whether in or out of the workplace, but can also be a concern when a company is performing due diligence in connection with a proposed transaction. Even where there is no specific privacy legislation in place, improper collection, use and disclosure of an employee s personal information can lead to legal action based on the tort of invasion of privacy or intrusion upon seclusion. Working in Canada The Immigration and Refugee Protection Act governs the admission of foreign nationals into Canada. No work permit is required for business visitors who visit Canada to meet with Canadian clients or to assess trade or business opportunities. Work permits are required for foreign nationals who will be providing their services in Canada. A number of programs exist to facilitate work permits and entry to Canada. 4.4 Doing Business In Canada: Employment Law

23 Financing a Business Operation in Canada Canadian Banking System External Debt Financing Businesses operating in Canada may raise capital through debt and/or equity financing as well as other financing options. In Canada, the most common conventional source of external debt financing is a commercial bank. Canadian Banking System Canada has one of the most sophisticated and stable banking systems in the world. The federal Bank Act governs the banking activities of Canadian and foreign banks. Banking services are provided by Canadian-owned banks (known under the Bank Act as Schedule I banks), foreign bank subsidiaries (known under the Bank Act as Schedule II banks) and foreign bank branches (known under the Bank Act as Schedule III banks). All are subject to supervision by the Office of the Superintendent of Financial Institutions (OSFI), an agency of Canada s federal government, although the Canadian supervision of foreign bank branches relates only to their business in Canada. The Canadian Payments Association operates two national payments systems: the Large Value Transfer System for significant electronic wire transfers and time critical payments, and the Automated Clearing Settlement System through which cheques and automated payments are cleared. All major credit and debit cards are widely accepted in Canada. The Code of Conduct for the Credit and Debit Card Industry in Canada is intended to promote fair business practices and help merchants and consumers understand the costs and benefits associated with credit and debit cards. Trust, insurance and loan companies as well as banks may operate as commercial lenders. Debt financing may also be obtained from credit unions and caisses populaires. These other types of regulated financial institutions may be subject to federal or provincial government regulation. All regulated financial institutions are subject to laws of general application including laws Doing Business In Canada: Financing a Business Operation in Canada 5.1

24 affecting the nature and distribution of financial products. Cross-ownership of Canadian financial institutions is permitted under the federal legislation and, for example, a bank, trust or loan company may own an insurance company and an insurance, trust or loan company may own a bank. Most trust companies and brokerage houses are owned by one of the major Canadiancontrolled chartered banks. However, each of the major types of financial institution retains some exclusivity over core business functions: only a trust company may act as a fiduciary (trustee) and only an insurance company may engage in the business of insurance. Banks, trust and loan companies, themselves, have only limited ability to promote the sale of insurance products or engage in dealing securities. External Debt Financing Types of Loans Third party financiers usually offer operating (a.k.a. revolving ) or term loans or a combination of the two on a secured or unsecured basis. Operating loans are typically offered on a short to medium-term basis to finance the borrower s (and its subsidiaries ) working capital requirements. Term loans are generally offered on a medium to long-term basis. They are available for a fixed time period and are repayable either in accordance with a prescribed schedule or when a prescribed default event takes place. Oftentimes, they require periodic principal payments, regularly scheduled interest payments and an end-of-term bullet payment. Domestic and Foreign Banks In Canada, commercial banks are qualified to provide financial services in Canada under the Bank Act. Generally, the least expensive source of funding available from a Canadian bank is a bankers acceptance ( BA ). A BA is a money-market instrument represented by a short-term note, issued by the borrower, which has been accepted that is, guaranteed by the borrower s Canadian chartered bank. This instrument permits any borrower to borrow money at a small premium over commercial money-market rates by, in effect, using the covenant of its banker to lower its cost of funds. The most common funding is Canada dollar loans which are priced in relation to the prime rate of its lender. Low-risk commercial loans are often done on an unsecured basis. Unsecured loans may require a negative pledge from the borrower to not grant a security over its assets (subject to some exceptions). Or, such a loan may require a guarantee from the parent and/or subsidiary and individual shareholders of the borrower. Each Canadian province has a Statute of Frauds which requires that agreements in the nature of guarantees be in writing and signed by the guarantor. For example, Alberta s Guarantees Acknowledgment Act provides (with limited exceptions) that no written agreement by any person other than a corporation has any effect unless the person entering into the agreement: Appears before a notary public; Acknowledges to the notary public that the person executed the guarantee; and In the presence of the notary public signs a statement in the prescribed form. More commonly, a commercial bank will require security (and may also require guarantees from the parent and/or subsidiary and individual shareholders of the borrower). In that case, the borrower will charge all or part of the property and assets of the business including accounts receivable, inventory, fixed assets and real estate. If the borrower defaults under the terms of the loan, the bank may sell or take ownership of the secured property. Often, banks will enter into loan arrangements based upon short-form commitment letters or promissory notes and the granting of security by way of a general security agreement, without the requirement of a long (and expensive) loan agreement. (See Personal Property Security Regime below.) 5.2 Doing Business In Canada: Financing a Business Operation in Canada

25 While loans are usually made in Canadian or US dollars, Canadian banks will also lend in currencies other than Canadian dollars and can determine interest rates on borrowings with reference to LIBOR (the London Interbank Offered Rate ) or other reference rates. Advances under credit facilities will often provide for advances by way of a letter of credit or letter of guarantee, depending on the needs of the borrower. A borrower may require a hedging program to attempt to mitigate the risk of interest rate, or exchange rate, fluctuations. In addition, in Canada loans are available from lenders with specialized industry knowledge who are able to make credit advances using higher margin rates on certain equipment and other collateral (asset-based lending) that are larger than would be available from conventional lenders. These credit arrangements are generally more complex, require timelier and more extensive reporting, and may involve lock-box bank accounts under the sole control of the lender into which borrower receipts are deposited on a daily basis. Personal Property Security Regime Short or long-term loans may be secured against the personal or real property of the borrower. (For loans secured against real property, see Security on Land in Ontario below.) All of the common law provinces and territories in Canada have personal property security regimes that govern the taking of security over a business s personal property. Québec has a separate provincewide system for registering public notice of security governed by the Civil Code. The personal property security act ( PPSA ) of each common law province and territory is based (in part) on Article 9 of the US Uniform Commercial Code. The PPSA permits a debtor to grant a security interest (a charge) to a creditor by charging any form of personal property in which the debtor has an interest. This regime also includes rules for any lease, no matter its form, with a term of more than one year. The charge either secures the debtor s obligations to the secured party under a security agreement, or secures the obligations of another person (i.e., where the debtor pledges collateral as security but does not assume any obligation under the other person s agreement with the secured party). Filings in the public register maintained by each common law province and territory are done by remote electronic access as are the searches of those public registers. Generally, priorities of security interests are determined by order of perfection of such interests. For collateral other than financial assets, perfection is usually achieved by registration of a financing statement in the appropriate PPSA public register; however, there are many other provisions of the PPSA which trump the order of PPSA registration. The PPSA also permits a debtor to grant a purchase money security interest ( PMSI ) in the nature of vendor take-back financing or third party equipment lease or purchase financing. The PMSI is granted in favour of a secured lender who restricts the charge of the PMSI to the goods so financed and any traceable proceeds derived from such goods. Bank Act Security The Bank Act permits certain categories of borrowers (such as farmers and manufacturers) to create and grant special security in raw materials, work-in-progress, finished goods inventory, and specific assets and equipment in favour of Canadian chartered banks. The security gives the bank the same rights as a holder of a bill of lading. Since the statute requires physical registration of notices, commercial banks usually require security under both the applicable provincial PPSA and, where appropriate, the Bank Act. Security on Land in Ontario A borrower who has an interest in real estate may charge that interest by way of a mortgage or charge in favour of a creditor. Ontario s electronic land registration system permits remote electronic access registration of transfers, mortgages and documents affecting title to real estate in Doing Business In Canada: Financing a Business Operation in Canada 5.3

26 the province. Title insurance is available in Ontario and its use is becoming more widespread, especially among commercial lenders. Since it usually takes several weeks to receive replies from municipalities about compliance with applicable zoning by-laws and the payment of taxes, title insurers will bind themselves by issuing title insurance without waiting for such off-title searches. In doing so, the title insurers assume the risk of any loss arising out of non-compliance. Other Financing Sources There are other sources of financing available to companies specifically to fund asset acquisitions. Capital assets acquired from a manufacturer on a conditional sale basis permit the company to use the assets while paying for them out of cash flow over time. Lease finance companies buy assets that the company wants and then lease those assets to the company. The company has use of the assets while paying installments over the term of the lease, and then has the option to buy the assets at the end of the lease. Certain assets of the company may also be pooled and transferred into a separate legal entity. That entity then finances the purchase of such assets by issuing debt (or debt-like instruments) into the capital markets that is secured by the assets themselves. This form of financing is known as securitization. Another form of financing involves a company selling its accounts receivables to a third party who advances a percentage of the amount of the receivables to the company. Once all of the receivables are paid in full, the third party will advance the remaining balance, net of any fees and interest charges, to the company. External Equity Financing Equity financing involves the issuance of shares of capital stock of a company. Private equity funds are a source of external equity financing that may occur in various stages of a company s growth cycle [i.e., during a start-up or expansion phase or (in Canada, in particular) to fund a buyout]. Many such funds are industry or jurisdiction-specific. For start-ups with perceived long-term growth potential that do not have access to capital markets, venture capital (a subset of private equity) may be an option. Due to the high-risk nature of such an investment, controlling ownership of the company is typically demanded. (Alternatively, a minority equity interest may be agreed to in exchange for substantial influence over the management and/or direction of the company). The ultimate objective of a private equity investment is to see the company through its initial public offering and then to sell the controlling (or minority) interest to the investing public at a steep profit. Note that the issuance of, and trading in, securities (i.e., shares) is governed by provincial securities legislation. Each province and territory in Canada is responsible for the regulation of securities. While some of the provinces and territories have harmonized certain elements of securities regulation, Canada does not have a federal securities regulator. Aircraft Equipment Security/Financing Canada and 12 of its 13 provinces and territories (with the exception of New Brunswick which is expected to follow soon) have passed legislation implementing the Cape Town Convention and the Aircraft Protocol (together, the CTC ). This significantly affects the practices for Canadian aircraft sale, financing and leasing transactions. In particular, registrations and priority searches now have to be completed at the International Registry in addition to registrations and searches under the relevant PPSA or Civil Code in Québec. In addition, an Irrevocable De- Registration and Export Request Authorization now must be deposited and registered with Transport Canada (this replaces the contractual Irrevocable Power of Attorney previously typical in aircraft finance or lease transactions). This new regime should be carefully considered by any entity looking at selling, financing or leasing aircraft in Canada. 5.4 Doing Business In Canada: Financing a Business Operation in Canada

27 Usury Law In Canada, pursuant to the Criminal Code, it is an offence to charge interest higher than the criminal rate which is 60% per annum. This is vastly different than in the US, where each state has its own statute dictating interest rates that can be charged before they are considered usurious or unlawful. Public Financial Assistance for Business in Canada The federal government and each of the provinces offer government support programs. These programs can include incentives and subsidies or offer assistance with the facilitation of financing. Federal programs include Export Development Canada which provides risk insurance for Canadian exporters, loans to foreign purchasers of Canadian capital goods and guarantees to Canadian banks for export loans along with management training programs. The Business Development Bank of Canada provides high-risk loans to small- to medium-sized Canadian businesses. Under the federal Scientific Research and Experimental Development Tax Incentive Program, qualifying companies are entitled to an income tax credit of up to 35% of qualifying research and development expenditures. In addition, each province offers its own investment programs. For instance, the Ontario government supports local business enterprises primarily through special provincial, industryspecific tax incentives (i.e., the Ontario Emerging Technologies Fund) and tax credits (i.e., the Ontario Innovation Tax Credit). Special Requirements for Doing Business with the Federal and Provincial Governments There are a number of statutes that govern how businesses deal with the Government of Canada. This legislation includes: the Federal Accountability Act, which prohibits all corporate and union direct or indirect financial contributions of any kind to candidates or political parties at the federal level; the Conflict of Interest Act, which prohibits public office holders from exercising an official power to further their own private interests or that of any other person; the Canada Elections Act; the Lobbyists Registration Act, which imposes stringent rules surrounding lobbyists; the Public Service Employment Act; the Access to Information Act; the Public Servants Disclosure Protection Act; and the Financial Administration Act. In addition, there are a number of provincial statutes (e.g., Ontario s Financial Administration Act) that govern or limit dealings with the various provincial governments in Canada and any entity dealing with either the federal or provincial governments should consider all applicable legislation. Doing Business In Canada: Financing a Business Operation in Canada 5.5

28 Foreign Investment When Does The ICA Apply? Review vs. Notification Which Investments Are Subject to Review Under the ICA? New Notification Thresholds What is a Cultural Business? Which Activities May Be Related to Canada s Cultural Heritage or National Identity? What Procedures Govern an ICA Review? What Factors Are Considered in Connection With the Net Benefit Test? Review on National Security Grounds Investments by State-Owned Enterprises When is an ICA Notification Required? For foreign companies considering doing business in Canada, the Investment Canada Act (the ICA ) provides complex, comprehensive rules designed to ensure that investments by non- Canadians result in a net benefit to Canada. In addition to the net benefit review, all transactions are potentially reviewable on national security grounds. Transactions involving companies operating in certain regulated industries (e.g., telecommunications, broadcasting, financial services, transportation and natural resources) may be subject to several multi-jurisdictional regulatory requirements and approvals. And, there are separate guidelines for investments by state-owned enterprises ( SOEs ). When Does The ICA Apply? The ICA applies to acquisitions of control of a Canadian business or the establishment of a new Canadian business by a non-canadian. A Canadian business has a place of business in Canada, assets in Canada used for the business and (an) individual(s) employed in connection with the business. The ICA applies where a new Canadian business that is established by a non-canadian is either unrelated to any other business that the non-canadian is operating when the new business is established or, if so related, considered connected to Canada s cultural heritage or national identity. The ICA defines who a Canadian person is (e.g., a citizen or certain permanent residents) and provides detailed rules and presumptions regarding Canadian status (e.g., circumstances in which an entity is considered Canadian-controlled). Despite the rules regarding acquisitions of control, the Minister of Industry or Minister of Canadian Heritage (as applicable) can override both the general 6.1 Doing Business In Canada: Foreign Investment

29 rules regarding an investor s Canadian status and the rules and presumptions regarding control and acquisition of control. In so doing, the Minister may determine that an investor is not Canadiancontrolled, or an entity does not control another entity, or control has (not) been acquired. Review vs. Notification Where the ICA is applicable, investments are subject to either pre-closing review or post-closing notification. Generally, a reviewable direct acquisition of control of a Canadian business may not be completed until approved by the relevant Minister. Whether an investment is reviewable or requires notification depends on criteria such as whether: the business being acquired is cultural; the transaction is a direct (acquisition of a Canadian company) or indirect (acquisition of a non-canadian parent) investment; and the purchaser or vendor is a resident of a World Trade Organization ( WTO ) member country. All investments are subject to national security review (see Review on National Security Grounds below). Which Investments Are Subject to Review Under the ICA? Both direct and indirect acquisitions may be subject to review. The ICA considers a direct acquisition to be the acquisition of all or substantially all of a Canadian business s assets or a majority (or, in some cases, one-third or more) of the shares of the entity carrying on the business in Canada. A direct acquisition by a WTO investor (other than one involving a cultural business) is reviewable where the book value of the acquired Canadian assets exceeds $354 million for This threshold is expected to be replaced at some point in the future by a new $600 million enterprise value threshold (please see comments below under the heading New Notification Thresholds ). A direct acquisition by a non-wto investor is reviewable where the value of the acquired Canadian assets is $5 million or more. The ICA considers an indirect acquisition to be the acquisition of control of a Canadian business by virtue of the acquisition of a non-canadian parent entity. Indirect acquisitions by WTO investors (other than those involving a cultural business) are not reviewable. Indirect acquisitions by non-wto investors are reviewable where the value of the Canadian assets is $50 million or more. The $5 million threshold will apply if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction. New Notification Thresholds Upon certain of the 2009 amendments to the ICA taking effect, the $354 million asset-based threshold for direct acquisitions by WTO investors will be replaced with an enterprise value threshold. The new enterprise value threshold will be set initially at $600 million, increasing in steps, first to $800 million in the two years following the adoption of the new threshold and then to $1 billion. The threshold will be indexed annually based on Canada s gross domestic product (GDP). What is a Cultural Business? The higher WTO threshold for direct investments and the review exemption for indirect investments (as discussed above) do not apply where the relevant Canadian business is a cultural business. A cultural business is a Canadian business that carries on any of the following activities:»» The publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form, other than the sole activity of printing or typesetting of books, magazines, periodicals or newspapers; Doing Business In Canada: Foreign Investment 6.2

30 The production, distribution, sale or exhibition of: film or video recordings, audio or video music recordings, or music in print or machine-readable form; Radio communication in which the transmissions are intended for direct reception by the general public; Any radio, television and cable television broadcasting undertakings; and Any satellite programming and broadcast network services. The Department of Canadian Heritage has also issued specific policies applicable to book and periodical publishing and distribution. Note that even if the cultural business components of a Canadian business are minimal or incidental to the overall business, the investment is reviewable. A Canadian business that has both cultural and non-cultural components must file ICA notifications and/or applications for review with both Industry Canada and the Department of Canadian Heritage. Depending on the asset value of the transaction as a whole, each department will process the notice and/or conduct a review of activities relevant to its jurisdiction. Which Activities May Be Related to Canada s Cultural Heritage or National Identity? The acquisition of control of an existing Canadian business or the establishment of a new such business may also be reviewable, regardless of asset value, if the business is engaged in: the publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form; or the production, distribution, sale or exhibition of: film or video products, audio or video music recordings, or music in print or machine-readable form. These activities are deemed to be related to Canada s cultural heritage or national identity and fall under the jurisdiction of the Department of Canadian Heritage. An investor must be informed within 21 days of filing its completed ICA notification with the Department if a review is to be conducted. What Procedures Govern an ICA Review? An application for review must include annual reports or financial statements for the three most recent fiscal years and set out particulars of the proposed transaction, including information about the investor, the Canadian business and the investor s plans for the business. The relevant Minister has 45 days to determine whether to allow the investment. The Minister can unilaterally extend the 45-day period by an additional 30 days by sending a notice to the investor prior to the expiration of the initial 45-day period. Further extensions of time must be agreed to by the investor. If the investor does not receive approval or notice of extension within the applicable time then the investment is deemed approved. The investor may close a direct acquisition only after the Minister has approved, or is deemed to have approved, the investment. Failure to comply with these rules opens the investor to enforcement proceedings that can result in fines of up to $10,000 per day.»» Where the Minister determines that the investment will not be of net benefit to Canada, the investor is provided with an opportunity to make additional representations and to submit undertakings (discussed below) that demonstrate the net benefit of the investment. 6.3 Doing Business In Canada: Foreign Investment

31 What Factors Are Considered in Connection With the Net Benefit Test? The ICA requires the responsible Minister to consider certain factors (where relevant) in determining whether an investment is likely to be of net benefit to Canada. Submissions accompanying an application for review should address: The effect of the investment on the economic activity in Canada, including employment, use of Canadian products and services, and exports from Canada; How many Canadians will be employed, and in what positions, in the acquired or newly formed business or in the relevant industry; The effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; The effect of the investment on competition within the relevant industry or industries in Canada; The compatibility of the investment with national industrial, economic and cultural policies; and The contribution of the investment to Canada s ability to compete internationally. Typically, during the initial 45-day review period, the investor and Investment Canada or Canadian Heritage will negotiate a mutually acceptable set of time-limited (e.g., usually three to five years) binding undertakings to be provided in connection with the Minister s approval of the transaction. These undertakings comprise investor commitments concerning operation of the Canadian business following the completion of the transaction. Usually, these commitments: Obligate the investor to keep the head office of the Canadian business in Canada; Ensure that a majority of senior management of the Canadian business is comprised of Canadians; Maintain certain employment levels at the Canadian business; Make specified capital expenditures and conduct research and development activities based on specified budgets; and In some cases, make a certain level of charitable contributions. These undertakings normally are reviewed on a 12- to 18-month basis to confirm the investor s performance. Note that the ICA s enforcement provisions include potential fines of up to $10,000 per day for a breach of undertakings given in connection with ICA approval. Review on National Security Grounds All investments may be reviewed on national security grounds, even if they are not otherwise reviewable. The applicable test is whether an investment is injurious to national security. Note that as there is no minimum review threshold for a national security review, even minority or passive investments may be reviewable. In addition, a national security review may occur where the target entity has a place of business in Canada and/or individuals employed or self-employed in connection with the business and/or assets in Canada used in the business. The review may be triggered pre- or post-closing. If the review is triggered pre-closing, the transaction may not be completed until the Minister completes the review. An investor may be notified that an investment will be subject to a national security review or simply advised that the review is taking place. Timelines for clearance of reviewable transactions under the ICA will be extended to accommodate such reviews. Doing Business In Canada: Foreign Investment 6.4

32 Investments by State-Owned Enterprises In December 2012 the federal government announced that further acquisitions of control of Canadian oil sands businesses would only be of net benefit to Canada in exceptional circumstances. Amendments to the ICA adopted in June 2013 (but not yet in force as of the date hereof) will subject investments by SOEs to heightened scrutiny. Reviews of such acquisitions will consider the degree of control or influence that the SOE would likely exert over both the acquisition and the industry in which that acquisition operates, as well as the extent to which the foreign government in question would be likely to exert control or influence over the SOE making the acquisition. When is an ICA Notification Required? Where a non-canadian acquires control of an existing Canadian business or establishes a new Canadian business and, on its facts, the acquisition is not reviewable, the non-canadian must submit notification to Investment Canada before (or within 30 days of) closing, identifying the parties to the transaction, the number of employees employed by the business and the value of the business s assets. 6.5 Doing Business In Canada: Foreign Investment

33 Forms of Business Organization Branch Plant Operation Sole Proprietorship Canadian Corporation with Share Capital Partnerships Co-operatives Joint Venture with Others Business and Income Trusts Distributorship, Licensing and Franchise Arrangements Financial Reporting Standards Foreign companies may establish business operations in Canada using any one of the business forms described below: Branch Plant Operation A foreign corporation can register as an extra-provincial corporation in the province in which it conducts business by obtaining an extra-provincial license. As no new legal entity needs to be created, start-up costs are minimal. Additionally, losses commonly incurred in start-up branch operations can be written off against profits from the foreign corporation s other operations. There are disadvantages in establishing a branch plant operation including: transfer pricing risks; financial disclosure obligations; legal compliance issues; ineligibility for government funding; the need to post security for costs in a Canadian court proceeding; and the difficulties inherent in computing income for Canadian tax purposes. Sole Proprietorship Any person may carry on business in Canada under his or her own name or business style, subject to compliance with the federal Immigration and Refugee Protection Act and registration in the province(s) in which the person proposes to conduct business. Doing Business In Canada: Forms of Business Organization 7.1

34 Canadian Corporation with Share Capital A corporation may be incorporated in Canada with share capital either federally or provincially. Depending on the governing statute, a corporation with share capital may be subject to legislative provisions concerning: the residency of the corporation s directors; incorporation requirements; ongoing filing requirements; the establishment of a quorum for valid directors meetings; matters for which a special resolution is necessary; and the circumstances in which a corporation may indemnify its directors and officers. Advantages of Using a Corporation A Canadian corporation is a separate legal (taxable) entity that enjoys perpetual existence (unless dissolved). The corporate form of business organization is very familiar in the Canadian marketplace, and preparation of its documentation is a relatively modest expense. There are no minimum capitalization requirements for a corporation. Working capital can be raised through the issuance of debt or shares, and transfer of control can be affected by the transfer of issued and outstanding shares. The foreign parent company of a corporation is shielded from the general liabilities of its Canadian subsidiary unless a lender requires the parent company to provide a guarantee. Disadvantages of Using a Corporation There are greater regulatory requirements for corporations than there are for other forms of business organization. Both the federal and provincial regimes have detailed rules relating to the preparation of annual financial statements. Corporations must also adhere to financial solvency tests. Whenever shares are redeemed or purchased, or dividends are paid, the corporation must ensure that it will still be able to meet its obligations as they fall due and that the realizable value of its assets is not less than the sum of the corporation s third-party obligations and the stated capital (the aggregate amount paid for all shares as they were allotted and issued) of each class of its issued shares. Partnerships A partnership is a contractual relationship with legal attributes that are legislated provincially (not federally) for example, for partnerships carrying on business in Ontario, the Ontario Partnerships Act. There are two types of partnerships: general partnerships and limited partnerships. General Partnerships A general partnership is a form of business organization where parties carry on business with a common view to making a profit. Under Canadian law, a general partnership is not a distinct legal (taxable) entity from its constituent partners. General partners have fiduciary obligations to each other and each partner is considered the agent of the other partners. Disadvantages in establishing a general partnership include: the expense in preparing a general partnership agreement, given its highly detailed nature; the difficulty in attracting suitable partners and raising necessary capital; the joint and several liability of each partner for all partnership obligations; the limited existence of such partnerships; the need for each partner to qualify as carrying on business in the province(s) in which the partnership carries on business; and the potential complexity in transferring partnership interests. Whether or not a partnership exists is a question of fact and cannot be determined solely by the language of any agreement between the parties that either denies or asserts a partnership. Limited Partnerships A limited partnership is a separate statutory form of partnership created by filing a form prescribed by the applicable provincial Limited Partnerships Act. Canadian provincial laws permit the 7.2 Doing Business In Canada: Forms of Business Organization

35 establishment of a limited liability partnership ( LLP ) and a foreign limited partnership ( FLP ). In either case, one class of partners the limited partners has limited liability for the obligations of the partnership; otherwise, the limited partners have many of the same rights and obligations as the other class of partners known as the general partners. Limited partners are prohibited from participating in the management of the business. Note that only the general partners have joint and several unlimited liability for the obligations of the partnership. Co-operatives A special corporation known as a co-operative association may be established for certain purposes permitted by federal and provincial law. Examples of co-operatives include credit unions and insurance companies. The property and assets of a co-operative are owned by the members of the co-operative through their membership, not through share capital. The members are intended to benefit generally from the activities conducted by the co-operative. Note that a federally incorporated co-operative is intended to operate on a not-for-profit basis in at least two provinces. Joint Venture with Others A joint venture is a form of business organization based on a contract. Each of the parties to the joint venture contributes the use of property owned by it for a single, identified, common purpose. There is no statutory basis for this form of business organization. Under a joint venture arrangement, the parties maintain a significant degree of independence in conducting their other business activities. Business and Income Trusts Certain publicly listed trusts and partnerships (collectively referred to as specific investment flow-through vehicles or SIFTs) are taxed in the same manner as corporations in respect of taxable distributions, and unitholders are treated as having received dividends of such amounts. Distributorship, Licensing and Franchise Arrangements A foreign corporation or investor could enter the Canadian market indirectly through the use of independent sales agent, distribution, licensing or franchising arrangements. Foreign franchisors are generally advised to register under the extra-provincial corporations act(s) of the province(s) in which they intend to operate. Several factors may influence whether a foreign corporation chooses one of these arrangements including: intellectual property registration requirements; the possible application of a withholding tax; anti-trust provisions under the federal Competition Act; provincial regulation of the franchise relationship; the common law tests applied to establish a distribution arrangement; and the need to post security for costs in a court proceeding. Financial Reporting Standards Each Canadian publicly accountable enterprise ( PAE ) must (and any other enterprise who wishes to opt-in, may) prepare their financial statements according to International Financial Reporting Standards (IFRS) rather than Canadian generally accepted accounting principles ( GAAP ). PAEs which are cross-listed on the Toronto Stock Exchange and the US Securities and Exchange Commission (SEC) may prepare their financial statements in accordance with US GAAP. All other Canadian business enterprises may prepare their financial statements using Canadian generally accepted accounting principles for small and medium enterprises (SME GAAP). All Canadian not-for-profit entities may use Canadian GAAP in preparing their financial statements. Doing Business In Canada: Forms of Business Organization 7.3

36 Government Relations Government Policy in Canada Codes of Conduct Government Solicitation of the Private Sector Private Sector Solicitation of Government Donations to Political Parties In Canada s modern business environment, it has become increasingly important to have access to (and strong relationships with) key decision makers at all levels of government to carry out significant business goals. This is especially true for industries that are heavily regulated such as healthcare, technology, telecommunications, transportation, and financial services. Given the significant impact government relations have on business, every enterprise operating in Canada should consider a government relations strategy. Government Policy in Canada Both the federal and provincial governments play a key role in Canada s economic landscape. In Canada, legislative power is divided between the federal and provincial legislative assemblies. The political party with the most members elected to either the federal or provincial assemblies forms the government. The governing party usually holds a majority of seats; as it is highly unusual for members of the governing party to vote against a government-supported initiative, the relative influence of individual elected members of the legislature is greatly reduced. Individuals looking to influence or help shape government policy need to gain support from a wide range of political decision makers. Codes of Conduct Interaction between the private sector and government officials is highly regulated and has come under increased scrutiny in recent years. The conduct of public servants, office holders and others in Canada is subject to codes of conduct established by various federal, provincial and (in some cases) municipal governments. Codes of conduct for public officials generally regulate the kinds of activities that a public official may engage in and the hospitality (if any) that he or she may 8.1 Doing Business In Canada: Government Relations

37 accept. Codes of conduct also regulate the conduct of individuals, groups and companies who interact with public officials. Government Solicitation of the Private Sector All levels of government in Canada frequently solicit opinions from, and consult with, the private sector about legislative and other policy proposals. Federal, provincial and municipal governments also make purchases from the private sector, typically through requests for proposals (RFPs). In addition, these governments also develop and manage public-private partnerships ( P3s ) for the provision of public services and the development of public infrastructure in various sectors such as energy, healthcare and transportation. P3s are private business ventures that are funded and operated through partnerships between one level of government and one or more private sector companies. The private company provides public services or projects on behalf of the government, assuming significant financial, technical and operational risks associated with the business venture. Private Sector Solicitation of Government Lobbying Individuals, groups and companies are legally entitled to communicate with elected or appointed government officials. Lobbying is defined as communicating with public office holders, for payment, concerning legislative items and/or the awarding of certain financial benefits. Strategic lobbying can influence the outcome of public policy or legislative initiatives and reforms. Federal Lobbyist Registration Requirements Persons who communicate with public office holders for certain purposes are with some exceptions subject to public registration requirements and disclosure of the parties activities and proposed actions under federal lobbyist registration legislation. Federal public office holders include virtually any elected or appointed employee of the federal government (i.e., Members of Parliament, Senators, ministers, parliamentary staff, and members of the Royal Canadian Mounted Police and the Canadian Armed Forces). The Lobbying Act ( the Act ) identifies such purposes as including decisions about outsourcing; awarding contracts or grants; arranging meetings with public office holders; introducing, passing or amending legislation; and making or amending regulations. The Act is intended to ensure transparency and accountability in the lobbying of federal public office holders so that Canadians may have confidence in the integrity of the government decision-making process. The legislation recognizes the importance of free and open access to government and the legitimacy of the lobbying of public office holders. Individuals such as lawyers, accountants and other professional advisers who are hired (paid) to lobby on behalf of their clients (known as consultant lobbyists ) must register under the Act. Employees of corporations or organizations who spend 20 percent or more of their time lobbying for their employer (known as in-house lobbyists ) and any senior corporate officers who are engaged in any form of lobbying also must register. Initial registration includes submission of the name of the lobbyist, his or her firm and the client (and its subsidiaries and parent corporation, if applicable) to an electronic registry system. Registrants must also file an information return reflecting any change in their lobbying activity or the termination or completion of such activity. Additionally, both consultant and in-house lobbyists must file monthly information returns setting out the names of designated public office holders and the date and details of any communication with them. Doing Business In Canada: Government Relations 8.2

38 The Commissioner of Lobbying, an independent agent who reports directly to Parliament, administers the Act. He or she maintains the online Registry of Lobbyists, develops and implements educational programs and ensures compliance with both the Act and The Lobbyists Code of Conduct. The federal code requires lobbyists to conduct themselves with integrity and honesty, be open and frank about their lobbying activities and observe the highest professional and ethical standards. Exclusions Volunteer lobbyists are not required to register under the Act since they are not paid for their services. Likewise, Canadian citizens may communicate with public office holders without registering. Members of other levels of government, members of an aboriginal government or band council and diplomatic officials are exempt from the registration requirements. Requests for information, the interpretation of a Canadian law, or a verbal or written submission to a parliamentary committee likewise do not require registration. Penalties Any contravention of the Act (or regulations thereto) may result in a fine. Failure to comply with the registration requirements or knowingly filing false or misleading information may result in a substantial fine or imprisonment. Provincial and Municipal Lobbyist Registration Requirements Lobbyist registration legislation is also in force in all provinces across Canada except for Saskatchewan and New Brunswick (in which provinces legislation has been passed but is not yet in force) as well as Prince Edward Island (which has not yet introduced such legislation). At the municipal level, for example, the cities of Toronto and Ottawa have lobbyist registries, and municipalities in Québec and St. John s are covered by applicable provincial lobbyist registration legislation. The Ontario Lobbyists Registration Act requires paid lobbyists to register only if they try to communicate with a public office holder in an attempt to influence government policy, legislation or regulation, or the procurement of a financial benefit. Consultant lobbyists in the province also must register if they try to influence the awarding of a contract or try to arrange a meeting with a public office holder. Donations to Political Parties While citizens and permanent residents of Canada may make donations to federal political parties or federal candidates (within specified monetary limits), corporations and trade unions may not do so. At the provincial level, Ontario and Alberta permit corporations and trade unions to make contributions within monetary limits. British Columbia has no such limits, and Québec prohibits such contributions. 8.3 Doing Business In Canada: Government Relations

39 Intellectual Property Trademarks Copyright Patents Industrial Designs French Language Considerations Trade Secrets Domain Names Canada has a comprehensive legislative scheme to protect trademarks, copyright, patents and industrial designs. Trademarks The Federal Trademarks Act (the TMA ) grants exclusive rights to trademark owners and provides public notice of those rights. Canadian trademark law provides protection for both registered and unregistered trademarks. The Government of Canada recently passed significant amendments to the TMA. Those amendments, which are anticipated to be implemented in late 2015 or early 2016, are set to fundamentally transform the Canadian regime. The amended TMA defines a trademark as (a) a sign or combination of signs that is used or proposed to be used by a person for the purpose of distinguishing or so as to distinguish their goods or services from those of others, or (b) a certification mark, with the word sign being separately defined as including a word, a personal name, a design, a letter, a numeral, a colour, a figurative element, a three-dimensional shape, a hologram, a moving image, a mode of packaging goods, a sound, a scent, a taste, a texture and the positioning of a sign. i. Registered Trademarks a) Scope and Term The TMA provides the owner of a registered trademark with nationwide protection for the mark as registered. Unless it is challenged as discussed below, a Canadian trademark registration is valid for 15 years from the date of registration, although the new TMA shortens this term to ten years. The term is renewable for subsequent fifteen (or, after the new TMA comes into force, ten) year periods. Doing Business In Canada: Intellectual Property 9.1

40 b) Filing Basis While the current Act provides for several application grounds, under the new TMA, an application to register a mark may be filed if the applicant uses or intends to use the trademark in Canada. Under the new TMA, an applicant does not need to identify when its mark was first used in Canada or file a declaration post-allowance stating that a mark is in use before it will issue to registration. The TMA also provides for applications based on foreign priority. If an applicant with a pending application in its country of origin (and that country is party to the Paris Convention) applies to register the same or substantially the same trademark in Canada for use in association with the same kind of wares or services within six months from the date of first filing, then the date of filing in that country becomes the effective Canadian filing date. Foreign priority must currently be explicitly claimed within the six-month window in order to be valid. The new TMA provides for the possibility of a short extension. The new TMA also provides for Canada to become a party to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, or the Madrid Protocol. Once the Madrid Protocol is implemented by government regulations, this will allow applicants to obtain protection in Canada by filing an international application, as is currently allowed in jurisdictions such as the United States and Europe. c) Goods & Services An application must contain a statement, in ordinary commercial terms, of the goods or services in association with which the trademark has been (or is proposed to be) used. The amended TMA provides that the listing of goods and services in a Canadian application are to be grouped according to the classes of the Nice Classification system, much like in countries such as the United States. Currently, there is considerable uncertainty as to how this new requirement will be implemented. For example, it remains to be seen whether Canada will adopt a class-based filing fee structure or whether the Registrar of Trademarks ( the Registrar ) will require owners of existing registrations to re-classify the goods and services according to the classification codes. d) Examination & Opposition Once filed, a trademark application undergoes examination with the Canadian Intellectual Property Office ( CIPO ). In addition to reviewing the application for technical compliance with the provisions of the TMA, an examiner will conduct a search of the Canadian register to assess whether the mark is registrable and whether the applicant is entitled to seek registration. Examples of registrability and entitlement issues include: The mark is likely to cause confusion with an existing registration or pending application; The mark too nearly resembles a prohibited mark or designation (discussed below); The mark is primarily merely the name or surname of an individual who is living or has died within the past 30 years; or The mark is clearly descriptive or deceptively misdescriptive of the character or quality of the associated goods or services of the conditions of or the persons employed in their production or of their place of origin. The new TMA also permits the examiner to consider whether or not the trademark actually distinguishes or is capable of distinguishing the goods and/or services of the applicant from those of others. In this regard, draft regulations to the amended TMA propose that the Registrar will be entitled to receive correspondence from a third party other than the applicant any time before advertisement. If the third party submission is pertinent, the examiner will be required to forward that correspondence onto the applicant. The examiner then issues a report outlining any objections 9.2 Doing Business In Canada: Intellectual Property

41 to the application, typically within six to eight months of the filing date. The applicant then has an opportunity to amend the application or argue against any objections. If the examiner raises no objections or if the applicant overcomes any objections raised, the application will be approved and advertised in the Trademarks Journal. During the two-month period after advertisement, any third party may oppose the application based on several grounds including deficiencies in the application itself, the fact that the trademark is not registrable and/or distinctive, or the fact that the applicant is not the person entitled to registration. If there are no successful oppositions, the application will issue to registration on payment of a registration fee and filing of a declaration of use (if applicable). e) Summary Cancellation of Registrations Section 45 of the TMA provides a summary procedure for determining whether a registration is actually in use. If a trademark owner has not used a registered trademark in Canada within any three-year period following registration, the registration can be summarily expunged. This procedure is not intended to create or rescind substantive rights; rather, the procedure is designed to clear dead wood from the Canadian register. f) Enforcement of Registered Trademark Rights Both the Federal Court and provincial courts have jurisdiction to hear and determine an action or application for trademark infringement provided the infringement does not take place wholly abroad. A plaintiff who is ordinarily resident outside of Canada may be ordered to pay security for the defendant s costs; either in lump sum or on a scheduled milestone basis. However, applications or counterclaims seeking to expunge a registered trademark can only be advance in the Federal Court. ii. Unregistered Trademarks Canadian law also recognizes common law trademark rights acquired through actual use of an unregistered mark in Canada in association with goods or services. The owner of such a mark may assert claims against others who use confusing trademarks in the specific region or area where the common law trademark owner has built up goodwill, even if the mark is not used in Canada. This type of claim is referred to as passing off and is recognized both in the Canadian common law and under the TMA. A claim for passing off at common law is restricted to the area in which the plaintiff can establish the existence of goodwill. An action for passing off under the TMA may be brought in the Federal Court or in a provincial court of competent jurisdiction. As with any other enforcement proceeding in Canada, a plaintiff who is ordinarily resident outside of Canada may be ordered to pay security for the defendant s costs. iii. Prohibited & Official Marks Canadian trademark law has a unique regime for certain marks adopted by public authorities, universities and certain other organizations. Specifically, the TMA prohibits the adoption, which includes use and application for registration, of a variety of regal, governmental or public words, crests, symbols, marks or other devices. No person may adopt in connection with a business as a trademark or otherwise, any mark consisting of, or so nearly resembling as to be likely to be mistaken for, a prohibited mark. Prohibited marks that are adopted and used by a public authority as a mark are termed official marks. Public notice of adoption and use of an official mark does not retroactively prohibit the use of an existing mark; however, it does preclude the expansion of an existing registration to additional wares or services, or the registration of any pending application which was not registered at the time of the publication of the official mark, even if previously adopted, used and applied for. Doing Business In Canada: Intellectual Property 9.3

42 iv. Prohibited Designations Section 10 of the TMA states that where a mark has by ordinary and bona fide commercial usage become recognized in Canada as designating the kind, quality, quantity, destination, value, place of origin or date of production of any wares or services, no person shall adopt it as a trademark in association with such wares or services or others of the same general class or use it in a way likely to mislead. Copyright The federal Copyright Act governs rights associated with copyright law in Canada. Copyright protects the owner of a work from the unauthorized production or reproduction, public performance, or publishing of musical, literary, dramatic and artistic works. The Act also protects various rights in performances, communication signals and sound recordings. Additionally, an author is granted moral rights in the work, including the right to integrity of the work and the right to be associated with the work as its author. Copyright protects the material expression of an author s original work, and does not extend to the protection of ideas or concepts. Copyright protection commences upon creation and fixation (i.e., establishment of the work into some material form) of the work. However, with exceptions, there is a residency requirement in order to be afforded protection. The author must have been a citizen of or ordinarily resident in Canada, or a treaty country, at the time of creation of the work. A treaty country includes parties to the Berne Convention, the Universal Copyright Convention and members of the World Trade Organization. Although registration of copyright is not required, an optional and inexpensive registration application provides a certificate of registration, which evidences ownership and subsistence of the copyright. This may create a presumption that an infringer has knowledge of the existence of a copyright. Additionally, it is common practice to mark a work with a copyright symbol. The appropriate mark is the symbol along with the name of the copyright owner and year of first publication. In general, copyright subsists in Canada for 50 years following the end of the calendar year of the author s death, or last author s death in the case of joint-authorship. Moral rights subsist for the same term as the economic copyright in the work. Ownership of a copyright may vary, depending on the circumstances. In general, the author of a work is the first owner of the copyright. Of note is that in Canada we do not recognize the concept of a work made for hire as it exists in other jurisdictions, like the United States. However, if the author is an employee and creates the work during the course of his or her employment, the employer can be the first owner of the copyright. There are exceptions to the employment rules under the Act, such as where the work is an article or a contribution to a newspaper, magazine or periodical. Additionally, copyright may be assigned or licensed. Any transfer in ownership must be in writing and should be recorded with CIPO. Note that moral rights may not be assigned, but they may be waived, in whole or in part. Infringement occurs if a person, without consent of the copyright owner, acts contrary to the Act or infringes the moral rights of the author. Third parties may also be subject to secondary infringement liability if they sell, rent, distribute or import a copy of the work that they ought to have known infringes copyright or would infringe copyright if it had been made in Canada. However, there are numerous statutory exceptions to infringement under the Act, some of which include: fair dealing for the purpose of research, private study, education, parody or satire; news reporting; non-commercial user-generated content; reproduction for private purposes; reproduction for instruction; and creation of backup copies. Additionally, it is not an infringement if an impugned work is in the public domain. Available remedies include temporary and permanent injunctive relief, damages (including statutory damages), rights to profits earned by the infringing party, delivery up and destruction of infringing works and punitive damages. 9.4 Doing Business In Canada: Intellectual Property

43 Patents The federal Patent Act governs Canadian patent law and the rights associated with protecting inventions. The grant of a patent to a person by the Patent Office of CIPO excludes others from making, constructing, using or selling the patented invention in Canada. A patent is, in other words, a government-issued monopoly to a claimed invention in exchange for disclosure of that invention to the public. In order for an invention to be patentable, it must comprise patentable subject matter and be novel, useful, and non-obvious. To be novel (and thus unanticipated), an invention must not have been previously disclosed to the public in Canada or elsewhere. The exception to this rule is that if the patent applicant was the one who made the first disclosure, then the applicant may file a patent application within one year of the that disclosure. To be useful, the invention must be functional. Mere scientific principles or abstract theorems cannot be patented. Finally, the invention cannot have been obvious (i.e., there must be an inventive step) to a person skilled in the art or science to which the invention relates. There is no protection for unregistered rights to an invention, so a patent application must be filed with CIPO either as a domestic Canadian patent application or pursuant to a timely national phase Canadian entry under a Patent Co-Operation Treaty ( PCT ) patent filing for the invention. A complete application will include a statement that a patent is being sought, the applicant s background information, a clear and full description and drawings of the invention, the intended operation or use of the invention, a claim or claims to the invention setting out the monopoly sought, and a filing fee. If the information required for a complete application is not available, certain minimal requirements are necessary for an applicant to be granted an official filing date. Canadian patent registration works on a first-to-file basis and, therefore, receipt of an official filing date is crucial. After filing, a request for examination, along with necessary fees, must be made within five years of the filing date. This is necessary in order for CIPO to review the application. If the five year period expires, CIPO will not review the application and will consider the application abandoned. The applicant would then be required to make a request for reinstatement. Similar to the Canadian law of trademarks discussed above, filing applications in various countries is facilitated by Canada s membership as a party to the Paris Convention. The filing date of an application in one country will be recognized by other member countries, as long as a subsequent filing is made in the desired countries within one year of the first priority filing. Consequently, various filings in different countries and at separate times will all be subject to the first filing date. Canada is also a member state to the Patent Co-Operation Treaty, and many Canadian patent applications find their genesis in national phase Canadian entry notifications under PCT patent applications (Canadian national phase entry having to be elected within 30 months of the earliest claimed priority date in the corresponding PCT application). Once a patent is granted, it has a non-renewable term in Canada of 20 years from the filing date. Although not required by the Act, it is common practice to mark a work with a patent number or patent pending symbol. However, it is illegal to mark an article as patented when it has not yet been granted a patent. Patent infringement occurs if a person makes, constructs, uses, or sells a patented invention without the permission of the patent owner within the granting country. Remedies for infringement may include damages, profits earned by the infringing party as a result of the infringement, delivery up and destruction of infringing goods, injunctions and, uncommonly, punitive damages. Doing Business In Canada: Intellectual Property 9.5

44 Where primary infringement is found, those who encouraged or solicited the infringement may also be found liable for inducing infringement. As well, importing into Canada goods that were legitimately produced off-shore but that might have infringed a valid Canadian process patent had they been made in Canada may also expose the importer or user in Canada to a patent infringement claim. A patent may be assigned and licensed in whole or in part. To be fully effective, an assignment or license must be in writing and should be recorded with CIPO. Industrial Designs The federal Industrial Design Act (the IDA ) affords protection to industrial designs in Canada. An industrial design is a visual, non-utilitarian feature of a finished article, including shape, configuration, pattern or ornament. The IDA does not protect ideas, features of an article that solely serve a utilitarian function, or materials or methods used in the construction of the article. To make a legal claim of ownership in Canada, an industrial design must be registered under the IDA with the Industrial Design Office. Registration provides an exclusive right to the industrial design for a non-renewable 10 year term. The full 10 year term is subject to payment of maintenance fees prior to the expiration of five years from the date of registration. Non-payment of maintenance fees may result in the expungement of the registration under the IDA. Registration prevents others from making, importing for the purposes of trade or business, selling, or renting any article that is not substantially different from the article subject to the registration. At the expiry of the 10 year period, anyone may make, import, sell or rent the industrial design within Canada. An application to register must be filed with CIPO by the current proprietor of the design along with appropriate application fees. If the article associated with the design has been published, in Canada or elsewhere, the application for registration must be made within one year of publication. The current proprietor can be either the first or subsequent owner of the design. The first proprietor is the author of the design, or the person for whom the design was executed for good and valuable consideration. A subsequent proprietor is a person who acquired ownership of the design from the first (or later) proprietor. The registration application includes a declaration that the applicant is the proprietor and that, to their knowledge, the design had not been used by another person. If the design was jointly created, the designers may register as joint proprietors. To be registered, a design must be original. An accurate description of the design and article to which the design applies must be included in the registration application. The description must include the features of the design and where they reside on the article, along with at least one high quality drawing or photograph of the design as applied to the finished article. Drawings or photographs must display the completed article in full. Although not required, after registration is complete, a product may be marked to indicate that it is registered as an industrial design. Without a mark, remedies for infringement may be limited to injunctive relief, as a defendant can argue that they were unaware and had no reasonable grounds to suspect that the design was registered. In general, a registrant may enforce their rights against any person who infringes the registered industrial design in Canada. Legal action must be brought within three years of the alleged infringement. Remedies for infringement may include damages, profits earned by the infringing party as a result of the infringement, delivery up and destruction of infringing goods, injunctions and, uncommonly, punitive damages. As with the other forms of intellectual property discussed above, industrial designs may be assigned or licensed. Any transfer in ownership should be recorded with CIPO. Assignments may be recorded against both pending and registered designs. 9.6 Doing Business In Canada: Intellectual Property

45 French Language Considerations The Québec Charter of the French Language generally requires that commerce and business in Québec be conducted in French. Firm names, product labelling, publications, contracts, signs, posters and commercial advertising must be written in French. A corporation may, in public posting and commercial advertising, use a trademark in a language other than French if such trademark is recognized (i.e., registered) under the TMA and a French version of it has not been applied for or registered in Canada. A corporation may also use a trademark in its business name in a language other than French under similar circumstances provided that a French generic term describing the nature of the business is included in the business name. Trade Secrets Trade secret rights that do not fall within the protections outlined above must be created by private contract. Also, at common law, certain relationships (i.e., employment relationships) may require confidentiality. Domain Names A domain name is an identification label that identifies protocol resources on the Internet. The Internet Corporation for Assigned Names and Numbers ( ICANN ) manages the top-level development and architecture of the Internet domain name space. It authorizes domain name registrars, through which domain names may be registered and reassigned. Recently, ICANN began allowing anyone to apply for and, subject to ICANN approval, administer new generic top level domains, or gtld s. There are, as a result, a virtually unlimited number of gtlds available to be registered. Doing Business In Canada: Intellectual Property 9.7

46 Privacy Law Does Canada Have Privacy Legislation? Provincial Legislation How Does Canada s Privacy Legislation Compare with Privacy Legislation in Other Jurisdictions? Anti-Spam Legislation Does Canada Have Privacy Legislation? Federal Legislation Canada has a comprehensive legal framework that governs the collection, retention, use and disclosure of the personal information of identifiable individuals in both the public and private sectors. Described as a middle ground between the European privacy regime and the US regulatory framework, the federal Personal Information Protection and Electronic Documents Act ( PIPEDA ) applies generally to the collection, use and disclosure in the course of commercial activities in the private sector. Personal information under PIPEDA means any information about an identifiable individual other than such person s business card information that is, the name, title, business address or telephone number of the employee in question. An individual s business address is currently considered personal information under PIPEDA. Federal Privacy Guidelines PIPEDA is based on a set of privacy guidelines that were developed by the Canadian Standards Association that may be summarized as follows: Accountability of the organization that has personal information under its control; Identification of the purpose for which the information is collected; Consent from the individual whose personal information is being collected, used or disclosed; 10.1 Doing Business In Canada: Privacy Law

47 Limitation of the personal information collected and the use, disclosure and retention of personal information to that which is necessary for the identified purpose; Accuracy, thoroughness and currency of the personal information for the identified purpose; Protection of personal information via safeguards; Openness of an organization s policies and practices concerning personal information management; Access to (and the opportunity to challenge the accuracy and completeness of) personal information that has been collected, used and/or disclosed about an individual by that individual; and The opportunity to challenge an organization s compliance with these principles. Recognition of PIPEDA With limited reservations, the European Union has recognized PIPEDA as providing an adequate level of protection for personal data transferred from the European Community to Canada. For personal information sent to organizations in Canada that are not subject to PIPEDA, the EU s standard contractual clauses must be used. Federal and Provincial Jurisdiction Since Canada s Constitution provides that labour and employment are matters over which the provinces have jurisdiction (and not the federal government), PIPEDA only applies to the collection, use and disclosure of the personal information of employees of federal works, undertakings, or businesses. Three Canadian provinces Alberta, British Columbia and Québec have broad private sector privacy legislation presently in force. Organizations operating in those provinces are exempt from PIPEDA compliance concerning the collection, use and disclosure of personal information occurring within each of those provinces. Where both the federal and provincial legislation apply, compliance with both applicable statutes may be required, depending on the circumstances. Provincial Legislation The provincial statutes are implicitly (if not explicitly) modelled on the same type of privacy principles as PIPEDA. Ontario Privacy Legislation Although Ontario did not pass an equivalent to PIPEDA, it did enact the Personal Health Information Protection Act, 2004 ( PHIPA ). Health information custodians, as defined in PHIPA, are exempt from the application of Part I of PIPEDA regarding the collection, use and disclosure of personal health information occurring within the province. Ontario also enacted both the Freedom of Information and Protection of Privacy Act and the Municipal Freedom of Information and Protection of Privacy Act. These statutes contain provisions intended to protect personal information collected by provincial and municipal governments and provide the means to access government records. Similar legislation has been enacted in all of the other provinces. The Privacy Act and Access to Information Act provide similar rights at the federal level. Alberta and British Columbia Privacy Legislation The Alberta and British Columbia private sector privacy statutes each of which is entitled the Personal Information Protection Act ( PIPA ) were enacted at the same time and are very similar (although not identical) in structure and language. Doing Business In Canada: Privacy Law 10.2

48 Personal Information Definitions While both PIPA statutes use the term personal information, the BC statute specifically excludes contact information from the definition (i.e., information to enable an individual at a place of business to be contacted including the name, position name or title, business telephone number, business address, business or business fax number of the individual). The BC legislation also excludes work product information (i.e., information prepared or collected by an individual(s) as a part of his or her responsibilities or activities related to his, her, their or its employment or business, but not including information about an individual who did not prepare or collect the information). Business Transaction Exemption Both the Alberta and BC PIPA statutes permit parties to a business transaction to collect, use and disclose personal information necessary to determine whether to proceed with the transaction, and to complete the transaction without the consent of the affected individual(s). The parties may so collect, use and disclose provided that they have entered into a form of non-disclosure agreement restricting the use and disclosure of the information to the purposes related to the business transaction. The BC statute also obligates the parties to notify affected individuals that the transaction has occurred and that their personal information has been disclosed to the other party. Employee Information The Alberta PIPA statute defines personal employee information while the BC PIPA statute defines employee personal information. In both cases, any information reasonably required to establish, manage or terminate an employment relationship can be collected, used or disclosed without consent. However, in Alberta, employee is defined to include potential, current or former employees and volunteers and personal employee information also includes information reasonably required to manage a post-employment or post-volunteer-work relationship. Under the BC legislation, the term is arguably more restrictive in that it refers to personal information about an individual that is collected, used or disclosed solely for the purposes reasonably required to establish, manage or terminate an employment relationship. Alberta-Specific Provisions Service Providers Outside of Canada The Alberta PIPA statute contains a special provision whereby certain notices must be provided to individuals at the time of collection of their personal information if a service provider outside of Canada is used to either collect personal information or if personal information is to be transferred to a service provider outside of Canada. Where any incident involving the loss of (or unauthorized access to or disclosure of) personal information occurs, and a reasonable person would consider that a real risk of significant harm to an individual exists as a result of such incident, the Alberta Information and Privacy Commissioner must be notified of such loss, unauthorized access or disclosure. Non-Profit Organizations The Alberta PIPA statute exempts non-profit organizations from compliance unless personal information is being collected, used or disclosed by the non-profit organization in connection with a commercial activity (as defined in the statute). Status of PIPA Legislation The current status of the Alberta PIPA is uncertain. In 2013, the Supreme Court of Canada declared the legislation was unconstitutional but suspended its declaration of invalidity for one year so that the province could pass remedial legislation. As of the date hereof, Alberta has yet to pass any amendments or a new law to do so Doing Business In Canada: Privacy Law

49 Québec Privacy Legislation The Québec Act Respecting the Protection of Personal Information in the Private Sector (the APPIPS ) predates PIPEDA by several years and, although based on similar privacy principles, is quite different in its structure and language. The APPIPS covers all persons carrying on a business in the Province of Québec including individuals who sell goods and services, partnerships and associations. The Act regulates the collection, holding, use and communication of personal information and, similar to PIPEDA, provides a procedure whereby a person may access a file held by a business about him or her and obtain rectification of any inaccurate, incomplete or equivocal information contained therein. Whereas, under PIPEDA, consent must be an informed consent, in the Province of Québec, s. 14 of the APPIPS requires that consent be manifest, free, and enlightened ; however, similar to PIPEDA, the consent is given for specific disclosed purposes. Such consent is valid only for the length of time needed to achieve the purposes for which is was requested. Consent given other than in accordance with these requirements is without effect. Manitoba Privacy Legislation The Province of Manitoba enacted the Personal Information Protection and Identity Theft Prevention Act (PIPITPA) in This statute, which is very similar to Alberta s (currently unconstitutional) legislation, has not yet been proclaimed in force. How Does Canada s Privacy Legislation Compare with Privacy Legislation in Other Jurisdictions? Right to Privacy The right to privacy is not enshrined as a fundamental freedom in the Canadian Charter of Rights and Freedoms. However, the protection of personal information (as discussed above) is recognized by statute. Certain provinces have statutorily created a tort of invasion of privacy. Whether such a tort exists at common law in Canada remains unsettled. In Ontario, the tort of intrusion upon seclusion has been recognized. No data controller or processor Canadian privacy law does not employ the concepts of data controller or data processor ; it simply refers to the collection, use and disclosure of personal information by organizations in the course of commercial activities. Obligations imposed at the time of collection would be the responsibility of the organization performing the collection, and the collecting organization must ensure that any other organizations to which it may provide this information for processing also comply with these obligations. Similarly, there is no requirement in the federal or provincial privacy legislation to register with any Canadian federal or provincial government entity as a data controller, or to notify any Canadian federal or provincial government body of any data processing. Transfer of Information Outside of Canada While neither PIPEDA, the private sector provincial privacy legislation, nor most of the public sector provincial privacy laws prohibit the transfer of personal information outside of Canada, certain provincial statutes applicable to the public sector do contain this prohibition. Nonetheless, there has been a great deal of discussion in Canada about the transfer of personal information to the United States and the implications of the USA PATRIOT Act. Where personal information is transferred out of Canada, the generally accepted best practice is to notify the individual in advance that his or her information may be subject to government access by lawful authorities in the recipient foreign jurisdiction. Doing Business In Canada: Privacy Law 10.4

50 Order-making Authority Canada s federal privacy commissioner does not have order-making authority. He or she is compelled to investigate complaints and issue reports, but may not order any particular action or impose any financial penalties. Privacy commissioners at the provincial level do have ordermaking authority. Mandatory Breach Notification Unlike the laws of many other jurisdictions, PIPEDA does not contain any mandatory breach notification provisions; however, the federal Bill S-4, known as the Digital Privacy Act, would introduce a number of amendments to PIPEDA, including a breach notification provision. Anti-Spam Legislation Canada s anti-spam legislation ( CASL ) came into force on July 1, CASL affects how businesses and organizations communicate with Canadians to encourage participation in a commercial activity through the use of commercial electronic messages ( CEMs ) i.e., s, text messages, instant messages, social media messages and other non-broadcast electronic communications, but not telephone calls, voice mails or faxes. CASL also affects how Canadians communicate electronically with the rest of the world. Disclosure and Consent Organizations and individuals are prohibited from sending CEMs without first disclosing certain identity, location and unsubscribe information about the sender (including additional disclosure where CEMs are sent on behalf of an affiliate or third party) and obtaining the express, informed, opt-in, consent of the recipient unless consent can be implied or an exclusion applies. CEMs must comply with message format and unsubscribe notification requirements. Implied Consent Implied consent may be found where there is an existing business relationship between the sender and recipient (who could be an individual). Such a relationship generally arises: From the purchase of a good, service, investment or interest in land, or a contract, and is generally valid for a two-year period; From certain types of volunteer, charitable and political activities or from membership in certain types of clubs, associations and voluntary organizations, and is also generally valid for a two-year period; Where the recipient s address has been conspicuously published without an accompanying anti-spam notice and the CEM is related to the recipient s business, role or official functions; or Where the recipient has disclosed his or her address to the sender without indicating that he or she does not want to receive CEMs at that address and the CEM is related to the recipient s business, role or official functions. Even where there is implied consent to its transmission, the CEM must still contain the sender s identity, location and contact information and a clear unsubscribe mechanism (as well as additional disclosure where the CEM is sent on behalf of an affiliate or third party) Doing Business In Canada: Privacy Law

51 Full and Partial CASL Exemptions Key full exemptions from CASL compliance include (but are not limited to) CEMs that: Are completely non-commercial in nature; Are sent to another organization (not an individual) with whom the sender has a relationship and are relevant to the recipient organization s activities; Inquire about (or make an application concerning) the recipient s commercial activity; Respond to requests, enquiries or complaints received from the recipient; Are sent to satisfy various legal/juridical obligations or notice requirements or enforce legal rights; Are sent among an organization s representatives and concern the organization s activities; or Are sent to a scheduled foreign state and comply with the foreign state s spam law that targets substantially similar conduct. Key partial exemptions include CEMs that: Facilitate, complete, or confirm a commercial transaction; Provide information about the employment relationship or benefit plans with a currently participating person; or Deliver or provide a quote/estimate, warranty, product recall or safety/security or factual information concerning ongoing use/purchase of a product, good or service (including updates and upgrades) in certain circumstances. CEMs that fall under a partial exemption must still contain the sender s identity, location and contact information and a clear unsubscribe mechanism (as well as additional disclosure where the CEM is sent on behalf of an affiliate or third party). Penalties for Non-compliance Penalties for non-compliance where CASL applies include: Significant Administrative Monetary Penalties; Potential personal liability for the organization s directors and officers, and As of 2017, a private right of action. Although a due diligence defence is available, to rely upon this defence senders must show that they have taken steps to bring their electronic communication practices into compliance with CASL, including establishing clear documentation trails. Doing Business In Canada: Privacy Law 10.6

52 Public-Private Partnerships Public-Private Partnerships P3s in Canada Federal P3 Projects Provincial P3 Projects Public-Private Partnerships Governments in both developed and emerging markets are seeking viable alternatives to direct public service delivery in their efforts to expand, rehabilitate or replace existing public infrastructure. One such alternative is a public-private partnership ( P3 ) whereby a public sector entity contracts with a private sector entity to provide specific assets and then to deliver specific services over many years. Under the terms of a P3 contract, the public sector owner specifies its requirements and the private sector partner engages its expertise and innovation to determine how best to meet those requirements. Payments under a P3 contract commonly are tied to milestones. The P3 model ensures that the infrastructure remains publicly owned while obligating the private sector to assume considerable responsibilities and risks in designing, building, financing, and operating (or maintaining) that infrastructure (i.e., schedule delays or cost over-runs). Risks associated with, for example, uninsurable events and industry-specific changes in the law typically are retained by the public sector. P3 procured public infrastructure projects potentially offer cost savings, service delivery efficiencies, and enhanced design and construction quality. Common P3 projects include hospitals, highways, bridges and schools. P3s in Canada The Canadian P3 market is among the most stable, sophisticated and robust public-private partnership procurement markets in the world. Governments at all levels across the country are committing considerable resources and embracing the P3 model to close the infrastructure gap and efficiently deliver crucial public infrastructure. A number of large-scale capital projects involving long-term privately financed concessions have been procured in some of the provinces. All of the provinces are expanding the sectors in which the P3 model is being employed. Significant 11.1 Doing Business In Canada: Public-Private Partnerships

53 infrastructure projects in the resource development sector (i.e., the Alberta oil sands) have attracted global participants such as foreign construction companies, operators, lenders and equity providers who commonly partner with major Canadian P3 participants. The federal government and several of the provincial governments across Canada have been addressing the country s growing infrastructure deficit through dedicated, specialized agencies that promote the P3 model. Particularly where federal funding is available (see discussion below), there has been significant interest in P3s at the municipal level. Federal P3 Projects PPP Canada PPP Canada (or P3 Canada ) is a federal Crown corporation that was created to facilitate the development of Canada s P3 market. The agency encourages P3 projects across a number of eligible categories as led by provincial, territorial, municipal and First Nations governments. Recently, P3 Canada has shown particular interest in providing financial support and expertise for large capital projects at the municipal level. P3 Canada s participation in the P3 market ensures that due diligence takes place at all stages of the project development lifecycle and that best practices are followed to ensure transparency, fairness and competitiveness. In achieving its mandate, this federal Crown corporation provides expertise and advice on various aspects of public-private partnerships; assesses and advises on the execution of federal P3 opportunities; and evaluates the suitability of P3 projects from other levels of government seeking federal infrastructure funding. P3 Canada Fund P3 Canada strategically administers the P3 Canada Fund. The Fund helps finance infrastructure projects launched by other levels of government across the country. A merit-based program, the Fund was established to encourage inexperienced jurisdictions to consider P3s in their public infrastructure procurements and to spur innovation in P3s. It is the first infrastructure funding program in Canada directly targeting P3 projects. To be considered by the Fund, projects must foster economic growth, support a cleaner environment, or promote stronger communities. Eligible projects potentially receive up to 25% of the direct cost of construction through nonrepayable (or repayable) contributions, loans or loan guarantees. The initial, five-year, $1.2 billion P3 Canada Fund supported projects across Canada with combined capital costs of more than $6 billion. P3 Canada has committed an additional $1.25 billion under the Fund through 2018, funding more jurisdictions and sectors than ever before. Priority will be given to public infrastructure projects that maximize private sector involvement and that target the transportation, water/wastewater and solid waste disposal sectors. Provincial P3 Projects Infrastructure Ontario While there is significant similarity in the public infrastructure procurement process and documentation across Canada, each province has its own legislative and regulatory requirements for P3 projects. Ontario and British Columbia have led the way at the provincial level in using P3 financing to procure their infrastructure requirements. The Ontario Infrastructure and Land Corporation (now Infrastructure Ontario ) was established in 2005/2006 to manage the implementation of major infrastructure projects (other than power supply projects for which there is already a dedicated provincial agency) in the province. The corporation s focus has shifted away from hospitals and public buildings (i.e., colleges and courthouses) to transit and power. With an extensive and continuing deal flow, Ontario remains Canada s busiest P3 market. In fact, Infrastructure Ontario has earmarked $35 billion for infrastructure through Doing Business In Canada: Public-Private Partnerships 11.2

54 Partnerships BC Like Infrastructure Ontario, Partnerships BC is the lead agency in the province for long-term concessions. Established in 2002 by the BC provincial government, the agency was an early adopter of (and has been a leader in) the P3 market in Canada. Owned by the Province, Partnerships BC brings together ministries, agencies and the private sector to develop public infrastructure projects. The provincial agency facilitates (and occasionally manages) partnerships on behalf of public sector agencies. Actively involved in project selection and development, the Crown corporation has shifted its focus away from transportation projects (i.e., highways and bridges) to more social accommodation projects such as hospitals as well as jails, courthouses and energy and water/wastewater projects. Alberta, Saskatchewan and Manitoba Alberta has a dedicated P3 (Alternative Capital Financing) office within the Alberta Treasury Board. The province enjoys fast closings and a fair degree of certainty with its P3 programs, given its simplified project agreement and relatively simple selection and completion process. The province s focus was on education and transportation; however, water/wastewater and rapid transit projects recently have been announced. SaskBuilds is bringing together public and private sector parties for major infrastructure projects such as roads, schools and correctional facilities in the province of Saskatchewan. Manitoba does not have a dedicated public infrastructure agency. Infrastructure Québec Infrastructure Québec was established in 2005 to advise the provincial government on the implementation and structure of P3 projects. The provincial infrastructure organization has procured social infrastructure such as hospitals, highways, jails and courthouses in the province. Maritime Provinces In the Maritimes, provincial organizations such as Partnerships New Brunswick have procured social infrastructure including schools and highways. Bundling school buildings into a single P3 project, the Nova Scotia Ministry of Infrastructure and Transportation is responsible for the procurement of that province s major infrastructure projects Doing Business In Canada: Public-Private Partnerships

55 Real Estate Investment Vehicles Acquisitions Real Estate Brokers Mortgage Brokers Financing Environmental Assessments Leasing Use and Development Taxation Proceeds of Crime Laws Governing the Acquisition, Use and Development of Real Estate The provinces and territories have primary responsibility for the acquisition, use and development of real property in Canada. With the exception of the province of Québec where property law is governed by the Civil Code of Québec property law in each jurisdiction has developed through the common law. Each jurisdiction has its own system for registering interests in real property. Interests are usually held in fee simple (absolute ownership for an indefinite duration) or as leasehold interests (tenure for a fixed period of time). Natural persons other than those with a legal disability but including non-residents as well as Canadian residents and citizens may acquire, hold and dispose of real property; however, provinces may impose restrictions and conditions in relation to the ownership of real property by non-residents. For instance, non-resident corporations holding real property in Ontario require an extra-provincial corporation licence. In addition, some provinces have imposed limits on acquisitions of agricultural land by non-residents. Investment Vehicles Several legal structures are available for investment in Canadian real estate including any one (or a combination) of the following: personal ownership; a corporation; a general or limited partnership; a condominium (whereby owners have title to their individual units and a proportionate interest in the condominium project s common elements ); co-ownership (known as a joint venture and usually structured as a tenancy in common whereby co-ownership is indivisible); or a trust. A Real Estate Investment Trust ( REIT ) is a kind of business trust whereby the capital from several investors is pooled together to invest in real estate. Each investor has an undivided beneficial Doing Business In Canada: Real Estate 12.1

56 interest in and is allocated a pro rata share of the trust s income and losses. REITs enjoy favourable tax treatment. Some REITs, other trusts, limited partnerships, corporations or individual property owners may establish a separate legal entity (usually a single-purpose corporation) that holds title to the real property as a nominee for the beneficial owner(s). While the property belongs to the beneficial owner, the nominee relationship may, for instance, facilitate a corporate reorganization or ensure the confidentiality of the beneficial owner s identity. Acquisitions The first document in a real estate acquisition usually is a written agreement between the buyer and seller known as an Agreement of Purchase and Sale ( APS ). The APS sets out the terms for the transaction as well as the parties warranties and representations. Once the parties have signed the APS, usually the buyer (through counsel) conducts the due diligence (i.e., title and zoning searches). Commonly, an engineering review of environmental and physical matters is conducted. A title insurance policy more often than a solicitor s title opinion is obtained to indemnify the insured s actual loss and to pay legal defence (and related) costs and expenses should a claim threaten the insured s title or mortgage. Where either party breaches their obligations under the APS, the other party may seek redress under the APS and/or at common law. Real Estate Brokers Parties looking to acquire or dispose of real estate usually hire a real estate broker to assist them. Real estate brokers are subject to provincial legislation designed to protect consumers. They are paid a commission for their services based on a percentage of the purchase price. The Real Estate Council of Ontario regulates trade in real estate in Ontario and administers the Real Estate and Business Brokers Act, Mortgage Brokers Mortgage brokers, lenders and administrators are subject to provincial regulation. In Ontario, the Mortgage Brokers, Lenders and Administrators Act requires mortgage brokers, administrators, brokers and agents to obtain a license to do business in the province. Financing Real estate financing usually is arranged through a bank, trust company, pension fund, credit union or insurance company. Various combinations of interest rates and terms are available depending on the institution involved, the nature of the transaction and the inherent risks. Lending institutions commonly take primary (i.e., a mortgage) and collateral (i.e., a general assignment of rents) security in real property and related assets to secure the loan. An indemnifier or guarantor may also be required. Foreign lenders may be subject to withholding (and other) taxes on the interest paid to them under the loan agreement. Environmental Assessments Environmental laws at both the federal and provincial levels set out the duties of landowners for the storage, discharge and disposal of contaminants and other hazardous materials in connection with real property. Liability for environmental damage runs with the land which means that a future owner may inherit the liability of a previous owner. An assessment of environmental risks should be made before a property is purchased. Commercial lenders customarily require the completion of an environmental assessment before funds are advanced Doing Business In Canada: Real Estate

57 Leasing Real property may be purchased or leased. A long-term ground and building lease permits a tenant to lease vacant land and develop it for subletting to retail, office or other industrial subtenants. Most commercial office and retail space (and standard industrial space) in Canada is only available under a commercial lease and typically on a net/net rental basis. This means that the tenant pays basic rent plus a proportionate share of realty taxes and other maintenance charges. A retail lease may also require the tenant to pay rent based on a percentage of the tenant s annual sales. The parties to a commercial lease rely on specific provincial legislation that governs the landlordtenant relationship, along with the common law, to enforce their respective rights and obligations under the lease. Provincial legislation that regulates residential leases may override the terms of the parties lease agreement and, in some cases, regulates residential rent increases by the landlord. In Ontario, legislation also limits the landlord s ability to evict existing residential tenants and permits rent reductions in certain circumstances. Use and Development The use and development of real property are provincially regulated, primarily at the municipal level and mostly in the form of official plans, as well as zoning and building by-laws. Development charges on new developments are common as are restrictions on (and regulation of) an owner s ability to subdivide its property. Major energy and other developments on Aboriginal lands are subject to unique regulatory requirements including Aboriginal consultation and negotiation. Building codes set specific standards for new construction and regulate the maintenance of existing buildings. Obtaining building permits and all regulatory clearances is a typical preconstruction requirement. The municipalities of most provinces have adopted (in whole or in part) the National Building Code of Canada. Taxation Land transfer tax is imposed at graduated rates (based on the value of the consideration paid) on the transfer of real estate in some provinces. It may be imposed at both the provincial and municipal levels, and is generally paid by the buyer. For the sale of commercial and new residential buildings, the seller must collect goods and services tax ( GST ) or Harmonized Sales Tax ( HST ) in certain provinces as well as provincial sales tax ( PST ) for property located in the province of Québec. GST (or HST) is also imposed on rent payable under a commercial lease but not on rent paid under a residential lease. If certain goods (i.e., furniture or appliances) are included in the purchase of real property, PST is payable (where applicable) on such goods. Municipal taxes are payable by property owners annually based on the market value of their property. Income taxes are generally payable by Canadian residents and non-residents on the profits or gains (whether treated as capital gains or business income) from the disposition of land. If the seller is a non-resident, the buyer must withhold a percentage of the proceeds of sale unless the seller has obtained a clearance certificate from the tax authorities. Proceeds of Crime The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act ( the Act ) provides requirements for real estate developers and others to report suspicious transactions and large cash transactions. The Act also imposes other ongoing obligations including the development of a compliance regime and maintenance of certain records. Doing Business In Canada: Real Estate 12.3

58 Restructuring and Insolvency Reorganization Secured Creditor Enforcement Bankruptcy Reviewable Transactions Foreign Recognition Restructuring and insolvency law in Canada is primarily governed by two pieces of federal legislation: the Companies Creditors Arrangement Act (the CCAA ) and the Bankruptcy and Insolvency Act (the BIA ). Insolvency is a matter of federal jurisdiction and therefore these statutes are applicable throughout all provinces in Canada. The determination of creditor claims and creditor rights, however, often involves provincial law and therefore will vary between provinces, particularly Québec which has a significantly distinct creditor rights regime. The CCAA is Canada s primary reorganization statute for large companies; however, it may also be used to achieve a liquidation of assets. The BIA provides for (i) the reorganization of an insolvent company through a proposal proceeding; (ii) the appointment of a Receiver at the request of a secured creditor over the assets of an insolvent company; and (iii) the bankruptcy of an insolvent company (being a liquidation of a company s assets and a distribution of proceeds to creditors). The Winding-Up and Restructuring Act a separate piece of federal legislation applies to the insolvencies of banks, trust companies and insurance companies. The BIA provides that a corporation is insolvent if (i) it is unable to satisfy its obligations generally as they become due; (ii) it has ceased paying its obligations in the ordinary course of business (collectively (i) and (ii) are known as the cash flow test ); or (iii) if its assets, disposed of at a fairly conducted sale under legal process, would be insufficient to satisfy all liabilities due and accruing due (known as the balance sheet test ). Case law under the CCAA has adopted the BIA s definition of insolvency but has relaxed the definition to provide that if it is likely that the corporation will be insolvent on a cash flow basis in the reasonable future, it will also be held to be insolvent for purposes of the CCAA. Reorganizations (under both the CCAA and BIA), the appointment of a Receiver, the liquidation of assets in a bankruptcy, reviewable transactions and the recognition of foreign insolvency proceedings are discussed below Doing Business In Canada: Restructuring and Insolvency

59 An important feature of each of Canada s insolvency regimes is the role played by a licensed trustee in bankruptcy. A licensed trustee in bankruptcy has a different role in each proceeding (namely, as a Monitor in a CCAA proceeding, as a Proposal Trustee in a bankruptcy proposal, as a Receiver, as a Bankruptcy Trustee or as an Information Officer in a foreign recognition proceeding). In such roles, the licensed trustee in bankruptcy acts as a court officer with certain statutory and other duties as set out by the Court. As a court officer, the Court typically gives a great deal of weight to the views of the Monitor, Proposal Trustee, Receiver, Trustee in Bankruptcy or Information Officer on issues in the proceeding. Reorganization As noted above, both the CCAA and the BIA contain debtor-in-possession reorganization regimes. Corporations who (i) have obligations in excess of $5 million (alone or in conjunction with related entities seeking protection) and (ii) are incorporated under the laws of Canada or a province or have assets in Canada or do business in Canada are eligible to seek protection under the CCAA. Insolvent corporations who are incorporated under the laws of Canada or a province are authorized to carry on business in Canada or have an office or property in Canada are eligible to seek protection to attempt to reorganize by filing a proposal or a notice of intention to make a proposal (an NOI ) under the BIA. The CCAA and the BIA proposal sections contain many similar provisions. For example, each provides for (i) the approval of debtor-in-possession financing; (ii) the granting of priority charges for administration costs, debtor-in-possession financing and director s liabilities; (iii) the forced assignment of agreements; (iv) the disclaimer or repudiation of agreements; (v) prohibitions on sales of assets out of the ordinary course of business without Court approval of such sale(s); (vi) the postponement of equity claims; (vii) the preservation of intellectual property licenses; and (viii) voting thresholds on plan or proposal to put creditors. In addition, both the BIA proposal sections and the CCAA contain provisions which permit certain claims against directors to be stayed during proceedings and compromised in a proposal or plan. As well, in order to encourage directors to remain in a restructuring proceeding, both statutes provide the Court with the ability to order that the debtor company indemnify the directors for any obligations which they may incur following initiation of the proceedings and grant a charge over the debtor company s assets as security for such indemnity in priority to other creditors. However, there are some significant differences between the two reorganization regimes. Generally speaking, the BIA proposal provisions are seen as much more rule based and less flexible than the CCAA. The CCAA, on the other hand, is a more court-driven process that provides a great deal of flexibility, but it is viewed as more expensive. The CCAA is typically used for more complex corporate proceedings. CCAA Reorganization A CCAA proceeding is commenced by application to the Court in the province where the debtor company s head office or principal place of business is located. The initial application is typically made by the debtor corporation, but may be made by a creditor. It must be accompanied by substantial evidence to support the broad ranging relief sought. Specifically, the CCAA requires that a weekly cash flow projection be filed with the Court along with all the financial statements (audited and unaudited) prepared in the last year, or if none were prepared in that time period, the most recent financial statements. Upon the Court declaring that a corporation is entitled to protection under the CCAA, the Court may make an order staying proceedings against the company on such terms as the Court finds appropriate. It is typical that a very broad stay of proceedings be granted by the Court, but the scope of such stay is within the Court s discretion. As with a BIA proposal proceeding, exemptions Doing Business In Canada: Restructuring and Insolvency 13.2

60 to the initial stay for regulatory bodies and eligible financial contracts exist. The initial stay under the CCAA can be for a maximum of 30 days. Following the initial 30 day period, however, there is no limit on the length or duration of the stay extensions granted by the Court. Upon the granting of an initial order under the CCAA, the Court is required to appoint a Monitor to act as the Court s officer. The Monitor s role is similar to that of a Proposal Trustee in the BIA proposal proceeding, but often the CCAA court order will provide the Monitor with additional powers or duties. Although the CCAA is primarily a debtor-in-possession statute, in certain circumstances the powers of management have been transferred to the Monitor by court order. As noted above, the CCAA is a very flexible statute and in large part governed by the various court orders made within the proceeding. The CCAA contains no detailed statutory claims process, rather the process of calling for claims, adjudicating claims and barring claims not filed is established by court order. The debtor company, with the assistance of the Monitor, may put forward a plan of compromise or arrangement to the Court. There are certain required payments which must be provided for in the plan (i.e., certain wages, benefit payments and tax payments). Subject to certain statutory restrictions, the plan may contain any provision that a legal contract may contain. Plans may involve creditors accepting various forms of compromise to the immediate payment of their claim, including a reduced payment, payment over time, a debt for equity conversion or other compensation. The Court initially reviews the plan and may accept it for filing and distribution to the creditors if it meets the requirements set out in the CCAA. A court order approving a plan for filing typically establishes rules regarding the calling of a creditors meeting for a vote on the plan. A plan may be put to one or more classes of creditors, both secured and unsecured. Each class must individually vote on the plan. To be accepted by the creditors of a class the plan must be approved by more than 50% of the creditors voting on the plan (in person or by proxy) who represent 2/3 in value of those creditors voting. A creditor related to the debtor company may vote against, but not for, a plan. The plan is only binding on those classes who approve the plan once sanctioned by the Court. There is no ability for one class of creditors to cram down a plan on another class of creditors. Following the approval of the plan by the creditors, it must be brought to the Court for sanction (the Court s final confirmation of the plan). BIA Reorganization Unlike a CCAA, a BIA proposal proceeding does not commence with a Court application. It is possible to commence a BIA proposal proceeding by filing a proposal, but it is much more common to initially file an NOI. The proposal or the NOI are filed electronically by the proposed Proposal Trustee with the Office of the Superintendent of Bankruptcy. The filing of the NOI or the proposal triggers a stay of proceedings against the debtor corporation, the scope of which is set out in the BIA. Generally, all unsecured and secured creditors are caught by the stay. However, the stay does not apply to a secured creditor who, more than 10 days prior to the filing of the NOI or proposal, gave the debtor corporation notice of its intention to enforce security in the prescribed manner (as discussed further below). The initial stay upon filing of an NOI is 30 days, but may be extended by the Court on application of the debtor company in increments of 45 days at time to a maximum stay period of six months. As with a CCAA plan, the BIA contains provisions mandating certain payments in a proposal, but otherwise, a proposal may contain any term that could otherwise be in a contract. A proposal must be made to at least one class of unsecured creditors, but can also be made to a class or classes of secured creditors. Once a proposal is filed, the Proposal Trustee is required to send the proposal to known creditors along with a report on the proposal and notice of a meeting where a vote will be held on the proposal Doing Business In Canada: Restructuring and Insolvency

61 Similar to a CCAA, to be approved by a class of creditors, the proposal must be approved by creditors holding a majority in number and more than 2/3 of the value of the claims voting. Creditors who are related to the debtor corporation are only entitled to vote against, but not for, the proposal. If approved by the requisite majorities of voting creditors, the proposal must be approved by the Court and once approved must be implemented. During the proposal proceeding, the BIA contains certain additional requirements that must be met (i.e., a cash flow must be filed within 10 days after filing the NOI. If at any point in time the debtor company fails to file the required material, if the stay of proceedings is not extended upon its expiry, or if the proposal fails to achieve the required majority votes or court approval, the debtor company is automatically deemed bankrupt. In contrast, under a CCAA proceeding, there is no deemed bankruptcy. Secured Creditor Enforcement Where the debtor is in default under a security agreement, the secured party has: The rights and remedies provided in the security agreement; The rights and remedies under provincial legislation governing personal property collateral (typically called the Personal Property Security Act or PPSA ); Rights and remedies under provincial legislation governing real property and mortgages; Rights under the BIA or certain provincial laws to apply to the Court for the appointment of a Receiver over the debtor s property and undertaking; and The right to commence an action to recover arrears of payment or compel specific performance of a contract (and to do so without terminating or otherwise triggering other provisions of the security agreement, unless the secured creditor chooses to do so). However, pursuant to the BIA, subject to certain exceptions, before a secured creditor may enforce against all or substantially all of the inventory, accounts receivable or other property used by an insolvent debtor in the operation of its business, the secured creditor must provide the debtor with 10 days notice of its intention to enforce its security in a prescribed form. The debtor may waive the 10-day notice period, but only after the notice has been delivered. Personal Property Security Other than the personal property security regime in Québec which is significantly different, most PPSA statues typically provide a secured party with five main rights in connection with personal property collateral: Collection Rights: A secured party is entitled to notify any person obligated on an account or on chattel paper or any obligor on an instrument to make payment to the debtor to re-direct such payments to the secured party (akin to a garnishment). The secured party is also entitled to take control of any proceeds to which the secured party is entitled under the PPSA. Possession upon Default: The secured party has, unless otherwise agreed, the right to take possession of the collateral by any method permitted by law. If the collateral is equipment and the security interest has been perfected by registration, the secured party may, in a reasonable manner, render such equipment unusable without removal thereof from the debtor s premises, and the secured party shall thereupon be deemed to have taken possession of such equipment.»» Disposition: Upon default under a security agreement, the secured party may dispose of any of the collateral, subject to the requirements of the PPSA. Doing Business In Canada: Restructuring and Insolvency 13.4

62 Foreclosure: The secured party has the right subject to the objection of other interested parties to retain the collateral in full satisfaction of the obligation following default. When the secured party exercises this right, it operates as a voluntary legislative foreclosure. While they may also pursue a judicial foreclosure, this step is rarely taken. The Right to Enforce a Secured Interest by Any Method Permissible by Law: This may include issuing a statement of claim or bringing a motion or application for injunctive relief (such as an interim order to recover collateral), or by using self-help remedies (such as electing to constructively seize the collateral, taking legal but not physical possession). The PPSA, however, qualifies the rights of secured parties by imposing a duty of reasonable care on those creditors having possession of a debtor s collateral (either directly or indirectly through the appointment of a Receiver). A secured party shall use reasonable care in the custody and preservation of collateral in its possession. A secured party is required to keep the collateral identifiable, but fungible collateral may be commingled. Unless otherwise agreed or where the collateral is an instrument or chattel paper, reasonable care includes taking necessary steps to preserve rights against prior parties. In exercising this duty, reasonable expenses (including the cost of insurance and payment of taxes and other charges incurred in obtaining and maintaining possession of the collateral and in its preservation) are chargeable to the debtor and are secured by the collateral held. The secured party may hold as additional security any increase or profits, except money, received from the collateral, and money so received, unless remitted to the debtor, shall be applied against the debt owing. Real Property Security In Ontario, mortgagees have three primary avenues for disposal of property when a mortgagor defaults on their mortgage payments: Contractual power of sale provisions; Statutory power of sale; and Foreclosure remedies. Power of sale provisions allow a secured creditor to realize the secured collateral faster and with fewer hurdles. It is common for a privately appointed Receiver (acting for the mortgagee) to sell mortgaged real property pursuant to the power of sale provisions contained in the mortgage and under provincial law. Further, to make the sale of the mortgaged property easier, the mortgage will also often give the mortgagee the right to obtain an order directing certain parties occupying the property to leave the property so that the mortgagee has possession of the property free of any interference from others, including the mortgagor or related parties (called an order for possession). In order to complete statutory power of sale proceedings or a foreclosure, the mortgagee must provide certain prescribed notices to prescribed parties, which afford the mortgagor and other interested parties certain protections, including the right to redeem the security. Real property security enforcement varies by province and power of sale remedies are not available in all provinces. In other provinces judicial foreclosure proceedings are common. Receivership In Canada, the most common method for a secured creditor to enforce its security against a debtor is through the appointment of a Receiver. Receivership is a process in which a company and its assets are placed under the control and management of a Receiver (a licensed trustee in bankruptcy) with the ability to continue to operate the business to maximize value for the stakeholders. Although a Receiver may be appointed 13.5 Doing Business In Canada: Restructuring and Insolvency

63 privately pursuant to rights under a security agreement, more often a creditor will seek the appointment of a Receiver by the Court which provides the Receiver with greater powers and protections. Although a court-appointed Receiver may be appointed at the behest of a secured creditor, once appointed the Receiver has a duty to act in the best interest of all creditors and is a court officer. In this case, the scope of a Receiver s appointment and their powers are established by court order and often vary. Typically, the primary objective in a receivership is to obtain a stay of proceedings in order to allow the Receiver to complete an orderly liquidation of the debtor s property and assets, which may include a sale as a going concern or a piecemeal liquidation of the assets. Accordingly, in the court order appointing the Receiver, the Receiver is typically provided with the power to continue to operate the business, including retaining employees and entering into contracts on behalf of the debtor, if the Receiver believes that it will maximize the value of the assets for the creditors. Generally speaking, the structure and options for the sale process to be conducted by the Receiver are similar to the CCAA, with the most notable difference being that the Receiver makes the decisions in place of company management/board. Bankruptcy As noted above, bankruptcy (i.e., liquidation) is governed by the BIA. Bankruptcy is a statutory process typically used to shut down an insolvent debtor company, liquidate its assets and distribute any proceeds to unsecured creditors. The bankruptcy may be initiated (i) voluntarily by the debtor filing of an assignment in bankruptcy, (ii) involuntarily by a court application by one or more creditors seeking a bankruptcy order against the debtor, or (iii) automatically if a debtor corporation fails to successfully complete a step in a BIA proposal proceeding. In each case, subject to the rights of secured creditors all of the debtor s assets and undertaking vest in a licensed trustee in bankruptcy, all employment contracts are automatically terminated and the company s management and board relinquish all power and control. The vesting of the assets in the Bankruptcy Trustee and the administration of the bankruptcy estate is, as noted, subject to the rights of secured creditors. Therefore, the secured creditors are free to enforce/realize on the assets themselves, including through a private or court-appointed Receiver. The Bankruptcy Trustee can however require secured creditors to prove their security and can elect to redeem the security; namely, pay out the debt owed to the secured creditor in order to realize on the assets itself for the benefit of the unsecured creditors. Redemption of the security is rare but may be desirable to the Bankruptcy Trustee if the value of the assets are significantly greater than the secured debt. Upon its appointment, the Bankruptcy Trustee must call a first meeting of creditors within 21 days of the bankruptcy. At the first meeting of the creditors, the creditors may appoint up to five inspectors of the bankrupt estate or agree not to appoint any inspectors. The inspectors are empowered to oversee and direct the actions of the Bankruptcy Trustee, including with respect to any sale of assets by the Bankruptcy Trustee (subject to certain exceptions). Regardless of whether the Bankruptcy Trustee has inspector approval of a sale, the Bankruptcy Trustee must still exercise reasonable discretion and act in good faith in making a sale of estate property and must ensure the sale is made in a commercially reasonable manner. The Bankruptcy Trustee may also apply to the Court for directions if it is unsure as to the best way to proceed or it appears that there may be disputes over the proposed sale. The BIA also provides for a priority scheme for the distribution of assets by a Bankruptcy Trustee. Certain priorities (in some cases even over secured creditors) are given to unpaid wages, missed pension payments, unpaid farmers or fisherman and unpaid source deductions. Limited rights of repossession are also given to unpaid suppliers who have delivered goods in the 30 day period before bankruptcy. Although unsecured creditors generally share rateably, the BIA does provide Doing Business In Canada: Restructuring and Insolvency 13.6

64 for certain preferred unsecured creditor claims (i.e., landlords for up to three months of rent) and certain postponed claims (i.e., equity claims). A levy on all distributions made by a Bankruptcy Trustee is also payable to the Office of the Superintendent of Bankruptcy. Reviewable Transactions In Canada, authority for the avoidance of transactions is contained in both federal and provincial legislation. Although the federal and provincial provisions are similar they are not identical, and thus differences may arise depending on the location of the debtor. Challenges to transactions under both federal and provincial statutes fall primarily, but not exclusively, into two categories: (i) preferences and (ii) fraudulent transfers or transfers at undervalue. Certain transactions may satisfy the requirements of both categories and may be avoidable under multiple statutes. An improper transaction that falls within these categories may be set aside or damages may be awarded against the benefiting party and/or against directors of the debtor in some situations. Preferences involve the transfer of property with the effect of benefiting one creditor over another. By contrast, fraudulent conveyances and transfers at undervalue are concerned with transactions that are designed to hinder the collection efforts of creditors or transfer assets away from the debtor without proper consideration and therefore apply to dealings with all parties, not just creditors. Fraudulent transfers/transfers at undervalue arise where no consideration is received by the debtor or where the consideration received is conspicuously less than the fair market value of the consideration given by the debtor, and apply to both the transfer of property or the provision of services by the debtor. While a preference is exclusively an insolvency related remedy, a transfer at undervalue/fraudulent transfer, in some of its statutory forms, may encompass solvent debtors outside of bankruptcy and restructuring proceedings. The BIA establishes certain look back periods for which a Bankruptcy Trustee is given additional powers to claw back money into the bankruptcy estate for both preferences and transfers at undervalue. These look back periods vary and may be up to five years depending on the circumstances and whether related parties are involved. Other types of actions to avoid improper transfers include actions under the business corporations statutes that allow for broad and equitable remedies to prevent, rectify or recover losses in connection with inappropriate transactions or oppressive conduct by a company, its controlling shareholders or directors. Foreign Recognition Canada has incorporated into both the CCAA and the BIA a modified version of the United Nations Commission on International Trade Law (UNCITRAL) model law on cross-border insolvency. In many respects, therefore, international recognition of foreign insolvency proceedings in Canada is similar to Chapter 15 of the US Bankruptcy Code. In brief, an authorized foreign representative in the foreign insolvency proceeding may bring an application to the Canadian Court for recognition of a foreign proceeding. The Canadian Court must determine if the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding. If the debtor company s center of main interest (COMI) is located in the jurisdiction of the foreign proceeding, the proceeding will be recognized as a foreign main proceeding. Once recognized as a foreign main proceeding, the Canadian Court is required to grant a limited stay of proceedings in respect of the debtor company. If the foreign proceeding is recognized as a foreign non-main proceeding, there is no automatic stay, but rather the relief granted is in the discretion of the Canadian Court Doing Business In Canada: Restructuring and Insolvency

65 Upon recognition of a foreign proceeding, the CCAA and BIA require the foreign representative to take on certain obligations, including the posting of notices related to the foreign proceeding. As well, although not required by the statute, it is typical that a Court will require the appointment of an Information Officer to monitor and report to the Court on the status of the proceedings. Once a foreign proceeding is recognized, the Canadian Court is to cooperate to the maximum extent possible with the foreign representative and the foreign Court. However, nothing in the foreign recognition provisions of the CCAA or BIA prevents the Canadian Court from refusing to do something that would be contrary to Canadian public policy. Doing Business In Canada: Restructuring and Insolvency 13.8

66 Securities and Corporate Finance How are Securities Offered? Continuous Disclosure Obligations for Public Companies Corporate Governance Best Practices What are the Registration Requirements? Dealer Registration Exemptions Adviser Registration Exemptions Mobility Exemptions International Dealer Exemption International Adviser Exemption Exempt Market Intermediaries Registration in Multiple Jurisdictions Changes to Québec Regulatory Framework The focus of securities regulation in Canada is disclosure of information on the one hand, and the regulation of market participants on the other. Capital markets in Canada are highly regulated, primarily through provincial and territorial legislation. There is currently no federal securities regulator in Canada, although this has been subject to debate for a number of years. In the fall of 2013, the Federal Minister of Finance along with his counterparts from the Provinces of Ontario and British Columbia announced the creation of the Cooperative Capital Markets Regulators to be based in Toronto, Ontario, which is to take responsibility for overseeing common national rules. The Provinces of Saskatchewan and New Brunswick have subsequently announced that they will also participate in this initiative. The common regulator initiative is expected to be put into place during the summer of Currently in Ontario, the Securities Act (Ontario) ( OSA ) governs the area and is supplemented by extensive regulations, regulatory rules and policies. There is also a relevant body of national and multilateral instruments, policy statements and other sources of regulation. Further securities rules and regulations may also be found in the listing rules and requirements of any securities exchange on which securities of an issuer may be listed, such as the Toronto Stock Exchange (the TSX ) or the TSX Venture Exchange (the TSXV ) Doing Business In Canada: Securities and Corporate Finance

67 How are Securities Offered? The Prospectus Requirement As a general rule, the issuance of securities in Canada requires the filing with securities regulators and delivery to investors of a comprehensive disclosure document known as a prospectus. This document sets out detailed material disclosure relating to the issuer and the securities being issued and must be reviewed by the applicable Canadian securities regulators. A prospectus must contain full, true and plain disclosure about the securities and the issuer. The requirement to prepare a prospectus is, however, subject to certain statutory and discretionary exemptions (see below). Unlike securities distributed under a prospectus exemptions, securities distributed under a prospectus are generally freely tradable. However, an issuer that files a final prospectus becomes a reporting issuer (i.e., a public company) and is subject to continuous disclosure obligations (see below). Exempt Distributions In many provinces and territories, securities can be sold without providing a prospectus (the Prospectus Requirement ) through the use of a statutory exemption. From an issuer s perspective, reliance on an exemption from Prospectus Requirement is generally based upon an assessment of whether the securities can be successfully marketed to a limited number of investors who meet certain criteria that would make them eligible to acquire the securities without the need for a prospectus. National Instrument Prospectus and Registration Exemptions ( NI ) largely harmonizes prospectus exemptions across the various Provinces and Territories of Canada. The following outlines certain key exemptions provided by NI : Private Issuer Exemption The private issuer exemption is available to private companies that are closely held. It is a very useful exemption for start-ups. A private issuer will qualify as such if its securities are (i) subject to restrictions on transfer that are contained in the issuer s constating documents or securities holder agreements; (ii) beneficially owned by not more than 50 persons (apart from current and former employees of the issuer and its affiliates); and (iii) has distributed securities only to specifically identified classes of investors who are persons that are not considered the public, including directors, officers, control persons, the family members and close business associates thereof, employees, existing securities holders and accredited investors. Accredited Investor Exemption This is the most popular exemption for private placement financings in Canada. Under the accredited investor exemption, a trade of securities of any value can be affected on an exempt basis if the purchaser is an accredited investor who purchases as principal. The accredited investor approach creates a laundry list of persons or entities that satisfy the notion of sophistication for specific reasons. The most notable types of accredited investor categories for individuals are based on high net financial assets or net income. The net financial asset test qualifies an individual as an accredited investor if individually or together with a spouse their financial assets (i.e., cash or securities) have an aggregate realizable value before taxes, net of any related liabilities, greater than $1 million. However, as an individual s principal residence is excluded from the definition of financial assets, the number of individuals who would qualify on the high net worth basis is likely to be few. Another category of accredited investor is an individual whose pre-tax annual income is greater than $200,000 in each of the two most recent years, or greater than $300,000 if combined with a spouse s income in each of those years. To fall under this category, the investor (and the spouse, where applicable) must have a reasonable expectation of exceeding the same net income level in the current calendar year. Doing Business In Canada: Securities and Corporate Finance 14.2

68 Employees, Executive Officers, Directors and Consultants Distributions by an issuer, a control person of an issuer or related entity of an issuer to employees, executive officers, directors or consultants of such issuer or a related entity of the issuer will be exempt from the Prospectus Requirement if participation in the trade is voluntary (the employee, executive officer and director and consultant exemption ). Transaction Exemptions The Prospectus Requirement does not apply to any distribution of securities conducted in connection with: (i) an amalgamation, merger, reorganization or arrangement under a statutory procedure; or (ii) the dissolution or winding-up of an issuer (the business combination and reorganization exemption ). Trades may also be completed on an exempt basis in connection with amalgamations, mergers, reorganizations or arrangements that are: (i) described in an information circular that complies with National Instrument Continuous Disclosure Obligations or a similar disclosure document that is delivered to each security holder whose approval is required; and (ii) approved by the securityholders. NI exempts any issue of securities pursuant to three-cornered amalgamations, as the business combination and reorganization exemption applies to a distribution made in connection with an amalgamation or merger done under a statutory procedure. Also, according to the companion policy, the business combination and reorganization exemption is available for all distributions of securities that are necessary to complete an exchangeable share transaction, even where such trades occur several months or years after the transaction. The Prospectus Requirement will not apply in respect of distributions made in connection with a take-over bid or issuer bid. Minimum Amount Exemption The prospectus requirement does not apply to a distribution to a person if that person purchases as principal, the security has an acquisition cost to the purchaser of not less than $150,000 paid in cash at the time of the distribution, and the distribution is of a security of a single issuer. The exemption will not apply, however, to a distribution of a security of a person if the person was created, or is used, solely to purchase or hold securities in reliance on the exemption. Resale of Securities Acquired under an Exempt Distribution In many provinces, securities offered pursuant to exemptions from the Prospectus Requirement are subject to what is known as the closed system. The purpose of the closed system is to promote an acceptable level of disclosure for a prospective purchaser. The rules regarding the resale of securities sold pursuant to exemptions are found in National Instrument Resale of Securities ( NI ), which has been adopted by all of the securities commissions in Canada. NI provides that unless certain conditions are met, first trades of securities distributed under an exemption will be subject to the Prospectus Requirement. Depending on the nature of the exemption under which the securities were originally sold, the securities may be subject to a four-month restricted period from the date of distribution during which they cannot be traded without a further exemption. In addition, among other things, the issuer of the securities must be a reporting issuer at the time of the first trade as well as for a four-month period preceding the time of the first trade. Alternatively, depending on the nature of the exemption under which the securities were issued, the securities may be subject to a seasoning period, which requires that the issuer of the securities is a reporting issuer at the time of the first trade as well as for the fourmonth period preceding the time of the first trade. However, the seasoning period requirements do not require that the holder of the securities have held the securities for four months. It should be noted that the restricted period conditions will generally apply to most sales made pursuant to available prospectus and registration exemptions Doing Business In Canada: Securities and Corporate Finance

69 Continuous Disclosure Obligations for Public Companies A company that is a reporting issuer (i.e., a public company) or the equivalent in a province or territory of Canada is subject to ongoing disclosure requirements under securities laws known as continuous disclosure obligations. Continuous disclosure obligations are divided in two main categories: The timely disclosure of material information, and The periodic disclosure of financial and other information. It is very important for a public company executive to get a good grasp of these requirements which are generally found in National Instrument Continuous Disclosure Obligations ( NI ). Timely Disclosure A fundamental principle of securities law is the requirement on reporting issuers to disclose material changes in their affairs on a timely basis. A material change, where used in relation to the affairs of a reporting issuer, means a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer; further, it includes a decision to implement such a change made by the board of directors of the issuer or by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable. When a material change occurs in the affairs of a reporting issuer, the reporting issuer is required to immediately issue a press release describing the change and, as soon as practicable (but no later than 10 days after the change), file with the securities commissions a material change report in the prescribed form. Making a materiality determination can be a delicate exercise for a public company. In doing so, it is necessary to take into account a number of factors that cannot be captured in a simple brightline standard or test, including the nature of the information itself, the volatility of the company s securities and prevailing market conditions. Some guidance is provided by National Policy Disclosure Standards ( NP ) in determining whether certain events or information could be considered material and therefore should be disclosed. 1 The policy states that actual or proposed developments that are likely to give rise to material information and thus require prompt disclosure include, but are not limited to, the following types of events or information: Changes in corporate structure including changes in share ownership that may affect control of the company, major reorganizations, amalgamations or mergers, and take-over bids, issuer bids or insider bids; Changes in capital structure including the public or private sale of additional securities, planned repurchases or redemptions of securities, planned splits of common shares or offerings of warrants or rights to buy shares, a share consolidation, share exchange or stock dividend, changes in a company s dividend payment or policies, the possible initiation of a proxy fight, and material modifications to the rights of security holders; Changes in financial results including a significant increase or decrease in near-term earnings prospects, unexpected changes in the financial results for any period, shifts in financial circumstances such as cash flow reductions, major asset write-offs or write-downs, changes in the value or composition of the company s assets, and any material change in the company s accounting policy; 1 s. 4.3 of NP Doing Business In Canada: Securities and Corporate Finance 14.4

70 Changes in business and operations including any development that affects the company s resources, technology, products or markets, a significant change in capital investment plans or corporate objectives, major labour disputes or disputes with major contractors or suppliers, significant new contracts, products, patents or services or significant losses of contracts or business, significant discoveries by resource companies, changes to the board of directors or executive management, the commencement of, or developments in, material legal proceedings or regulatory matters, waivers of corporate ethics and conduct rules for officers, directors and other key employees, any notice that reliance on a prior audit is no longer permissible, and the delisting of the company s securities or their movement from one quotation system or exchange to another; Acquisitions and dispositions including significant acquisitions or dispositions of assets, property or joint venture interests, and acquisitions of other companies, including take-over bids and mergers; Changes in credit arrangements including the borrowing or lending of a significant amount of money, any mortgaging or encumbering of the company s assets, defaults under debt obligations, agreements to restructure debt, or planned enforcement procedures by a bank or any other creditors, changes in rating agency decisions, and significant new credit arrangements. Issuers with securities listed on the TSX should also note that the exchange requires disclosure of all material information on a timely basis. Although similar to the securities law requirement to disclose material changes, the TSX requirement is significant because it applies to more developments than merely a material change, as defined in securities law. Under TSX listing requirements, material information is any information relating to the business and affairs of a company that results in, or would reasonably be expected to result in, a significant change in the market price or value of any of the company s listed securities. Material information consists of both material facts and material changes relating to the business and affairs of a listed company. In addition to the filing of material change reports (or disclosure of material information pursuant to the TSX requirements), issuers may also be periodically required to file business acquisition reports (a BAR ). A BAR must be filed following the acquisition of a business that is considered to be significant to the issuer. A BAR typically requires, among other things, financial statement disclosure regarding the acquired business. Periodic Reporting In addition to the timely disclosure of certain material information, reporting issuers are also required to make certain periodic disclosure filings which are generally found in NI Issuers who do not list their securities for trading, or whose securities are listed on certain junior exchanges (such as the TSXV), qualify as venture issuers and are generally subject to less onerous filing requirements. Pursuant to NI , a reporting issuer is typically required to make certain periodic filings, including: Audited annual financial statements, together with management s discussion and analysis of the operating results ( MD&A ); Unaudited interim financial statements, together with MD&A; CEO and CFO annual and interim certifications regarding the accuracy of certain periodic filings; Annual meeting and proxy solicitation materials, and Annual information form ( AIF ), which is a disclosure document that describes the issuer, its operations, prospects and risks, and which must be updated annually. Issuers that are venture issuers are not required to prepare and file an AIF Doing Business In Canada: Securities and Corporate Finance

71 Accounting Principles and Auditing Standards National Instrument Acceptable Accounting Principles and Auditing Standards establishes the acceptable accounting principles and auditing standards for issuers required to file financial statements or include financial statements in a prospectus or circular. Reporting issuers must generally use Canadian GAAP as set out in the CICA Handbook to prepare their financial statements. Since 2011, Canadian GAAP is International Financial Reporting Standards as issued by the International Accounting Standards Board. Restrictions on Insider Trading and Tipping Securities law prohibits a person or company in a special relationship with a reporting issuer from purchasing or selling securities of the reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed. In addition, securities law prohibits a reporting issuer and a person or company in a special relationship with a reporting issuer from informing, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed. The OSA also provides that every person or company in a special relationship with a reporting issuer who purchases or sells the securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable (in addition to other criminal and regulatory penalties) to compensate the seller or purchaser of the securities, as the case may be, for damages as a result of the trade. In addition, the OSA provides that every reporting issuer, person or company in a special relationship with a reporting issuer and a person or company that proposes to make a take-over bid for the securities of a reporting issuer, to become a party to a reorganization, amalgamation, etc. or to acquire a substantial portion of the property of a reporting issuer who informs another person or company of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable (in addition to other criminal and regulatory penalties) to compensate for damages any person or company that thereafter sells securities of the reporting issuer to or purchases securities of the reporting issuer from the person or company that received the information. The statutory defence available under the OSA for these contraventions is that the person or company in the special relationship with the reporting issuer had reasonable grounds to believe that the material fact or material change had been generally disclosed or the material fact or change was known or ought reasonably to have been known to the seller or purchaser, as the case may be. It is imperative that all officers, directors, employees and professional advisors of reporting issuers understand the necessity to: (a) keep undisclosed material information concerning the issuer confidential; (b) release any such information only to authorized individuals on a need-to-know basis and only in the necessary course of business (and emphasize the confidential nature of such information to the recipients thereof); and (c) refrain from buying or selling securities of the issuer during periods where material facts or material changes remain undisclosed. Insider Reporting Insider reporting is a reporting requirement of insiders, which include directors, officers and significant shareholder (over 10%) of an issue. The main purpose of this requirement is to track trading patterns and to help enforce breaches of the insider trading prohibitions. The main insider reporting requirements and exemptions as well as those requirements for certain insiders of reporting issuers are set out in National Instrument Section 107(2) of the OSA, as modified by NI provides that where an insider s direct or indirect beneficial ownership of, or control or Doing Business In Canada: Securities and Corporate Finance 14.6

72 direction over, securities of the reporting issuer changes from the latest insider report filed, he or she must file an updated insider report within five days after the date the change takes place. Audit Committee Standards National Instrument Audit Committees addresses corporate governance concerns regarding the effectiveness of an issuer s audit committee. Subject to limited exceptions, the instrument requires that a reporting issuer s audit committee have at least three members who are independent and financially literate. TSX Venture Exchange-listed and other Venture Issuers are subject to different requirements but are nonetheless required to provide annual disclosure with regards to, among other things, their audit committee members independence, financial literacy, education and experience. The instrument provides extensive guidance so that directors can make these determinations. The instrument sets forth the authority and responsibilities of audit committees and stipulates the prescribed disclosure of the charter, composition and education of the audit committee which must be made in the issuer s annual information form (in the case of TSX issuers) and in the issuer s management information circular (in the case of TSX Venture Exchange issuers and other Venture Issuers). Notably, the instrument also requires the preapproval by the audit committee of all non-audit services provided by the auditors. Special Rules for Natural Resources Issuers In Canada, disclosure of scientific and technical information related to mineral projects is governed by National Instrument Standards of Disclosure for Mineral Projects ( NI ), including the Technical Report Form F1 and Companion Policy Disclosure obligations in Canada are also guided by the standards set out by the Canadian Institute of Mining, Metallurgy and Petroleum ( CIM ). The three pillars of the NI are: (i) making disclosure of technical/scientific information on mineral projects the responsibility of an expert, the qualified person ; (ii) making such disclosure subject to a comprehensive technical report prepared and signed by qualified persons; and (iii) the standardization of definitions with respect to mineral resources and mineral reserves using CIM definitions. Disclosure with respect to oil and gas projects is governed by National Instrument Standards of Disclosure for Oil and Gas Activities. Exemptions for US Issuers and other Foreign Issuers Initiatives between Canadian and US regulators in the area of continuous disclosure are bringing the integration of the disclosure standards for Canadian and US capital markets closer to reality. Currently, a multijurisdictional disclosure system embodied in National Instrument The Multijurisdictional Disclosure System is in place among the Canadian provincial and territorial securities commissions and the SEC. Under this system, in the case of a cross-border securities offering, eligible issuers are generally required to prepare a single disclosure document rather than two disclosure documents, though certain additional limited information may be required to satisfy the requirements of the local jurisdiction. In addition, pursuant to NI , certain issuers who are regulated by the Securities and Exchange Commission ( SEC ) are exempt from many of the Canadian continuous disclosure requirements provided they comply with the requirements of US federal securities law regarding such disclosure and file the resulting disclosure documents in Canada. Certain foreign issuers who are not regulated by the SEC but who are subject to foreign disclosure requirements may be exempt from complying with Canadian continuous disclosure requirements if not more than 10% of their equity securities are held by resident Canadians Doing Business In Canada: Securities and Corporate Finance

73 Corporate Governance Best Practices Canadian regulators have taken a guideline approach with respect to best practices in corporate governance. Canadian public companies are required to disclose annually if they are complying with the recommended best practices or, if they are not, the reason for such non-compliance. This approach recognizes the reality that corporate governance is in a state of evolution and that uniform governance mechanisms may not be suitable for all different kinds of companies. Best Practices for Effective Corporate Governance (National Policy ) This policy recommends best practices for all reporting issuers, both corporate and noncorporate. These practices are not mandatory. The practices include: Maintaining a majority of independent directors on the board of directors: Independent means that a director has no direct or indirect material relationship with the issuer. Material relationship means a relationship that could, in the view of the issuer s board, reasonably interfere with the exercise of a director s independent judgment with certain individuals being deemed to have a material relationship with the issuer. These individuals are: A person who has been an employee or executive officer of the issuer in the previous three years; A person whose immediate family member has been an executive officer of the issuer in the previous three years; A partners or employee of the auditor or having an immediate family member who is employed by the auditor of the issuer or a person who has been such in the previous three years; A person who, or whose immediate family member, is or has been in the previous three years an executive officer of an entity if any of the issuer s current executive officers serves or served at that same time on the entity s compensation committee; and An individual who received or whose immediate family member receives more than $75,000 per year in direct compensation during any 12 month period in the previous three years from the issuer. In regards to income trusts, independence should occur at the trustee level. In regards to limited partnerships, independence should occur at the level of the board of directors of the general partner. Holding separate regularly scheduled meetings comprised only of independent directors. Appointing an independent director as chair. If this is not appropriate, then an independent director should be appointed as a lead director.»» Setting out a board mandate in writing. This mandate should address the following matters: integrity, strategic planning, managing risk, succession planning, corporate communications, required board approvals, internal controls, management information systems and investor feedback. Doing Business In Canada: Securities and Corporate Finance 14.8

74 Setting out position descriptions for the chair of the board and the chair of each board committee, directors and the CEO, which should include corporate goals and objectives the CEO is responsible for meeting. Providing new directors with orientation. Providing all directors with continuing education opportunities. Adopting a written code of business conduct and ethics for the directors, officers and employees of the issuer which is enforced by the board. This code of conduct is aimed at deterring wrongdoing and should address some of the following topics: conflicts of interest, reporting illegal or unethical behaviour, and fair dealing with investors, customers, suppliers, competitors and employees. Establishing a nominating committee to nominate new directors. This nominating committee should be comprised of independent directors and have a written charter. Having the board conduct a review with an eye to considering the size of the board and how appropriate it is, determining what competencies and skills the board should have, determining what competencies and skills each individual member has and keeping this in mind when recruiting new directors. Appointing a compensation committee that has a written charter and is composed of independent directors. Conducting regular assessments of board effectiveness and individual director effectiveness. Disclosure of Corporate Governance Policies (National Instrument ) This rule calls for a disclosure requirement regarding corporate governance practices that the issuer has put into place. The rule also requires the issuer to publicly file with the regulators any written code of business conduct and ethics that the issuer follows. Any explicit or implicit waivers from the code granted by the board to directors or officers would have to be disclosed immediately in a press release. The rule applies to all reporting issuers. However, exemptions will apply to the following: investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, some exchangeable security issuers and some credit support issuers. Issuers must disclose annually: The composition of the board, which directors are independent and whether the majority of the board is independent. Which directors are also directors of other reporting issuers. Whether the independent directors hold meetings in the absence of the non-independent directors and management. The attendance record of each director at directors meetings. The mandate of the board. The chair of each committee and directors. The position descriptions for the chair, the chair of each board committee and the CEO. Measures adopted respecting the orientation and continuing education of directors. The adoption of a code of ethics Doing Business In Canada: Securities and Corporate Finance

75 The composition of the nominating committee and its mandate or other nomination process. The composition of the compensation committee and its mandate or other compensation process. The assessment process for the performance of the board, of each committee of the board and of each board member. Governance Beyond Regulations Governance in Canada is more and more impacted by factors other than regulations and stock exchange rules. Institutional shareholder activism embodied by organizations such as the Canadian Coalition for Good Governance ( CCGG ) and Institutional Shareholder Services Inc. ( ISS ) play a significant role in Canada in the field of governance. The CCGG publishes yearly guidelines with respect to governance and principled executive compensation which go far beyond basic regulatory requirements. ISS, which is a service organization that provides voting recommendations to its clients (who are institutional investors), is also a dominant player in influencing governance practices and compensation practices of public companies. In addition, Canadian companies governance practices are significantly influenced by the evaluation criteria of the annual governance survey called Board Games published by The Globe & Mail (Canada s national newspaper). The Board Games survey ranks every year hundreds of public companies based on its evaluation methodology. These organizations and media are at the forefront of the development and adoption of best practices in governance in Canada. For example, say-on-pay voting is voluntary in Canada, but has been given increased attention by market participants as a result of the media and shareholder interest organizations. CCGG has recommended that all boards adopt say-on-pay voting, and ISS has published guiding principles that it will use for its recommendations to its clients for a say-on-pay vote. What are the Registration Requirements? Business Registration Trigger Under Canadian securities law, a firm must register under National Instrument Registration Requirements and Exemptions (NI ) if it is In the business of trading; In the business of advising; Holding itself out as being in the business of trading or advising; Acting as an underwriter, or Acting as an investment fund manager. Individuals must register if they trade, underwrite or advise on behalf of a registered dealer or advisor, or act as the ultimate designated person ( UDP ) or chief compliance officer ( CCO ) of a register firm (see below). Except for the UDP or CCO, individuals who act on behalf of a registered investment fund manager do not have to register. There is no renewal requirements for registration, but fees must be paid every year to maintain registration. Doing Business In Canada: Securities and Corporate Finance 14.10

76 What is the Business Trigger? To determine if an individual or a firm must register, it is important to look at the type of activity and whether it is carried out for a business purpose. The Companion Policy to NI suggests the following factors should be considered in determining whether there is a business purpose: Engaging in activities similar to a registrant Intermediating trades or acting as a market dealer Directly or indirectly carrying on the activity with repetition, regularity or continuity Being, or expecting to be, remunerated or compensated for carrying on the activity, and Directly or indirectly soliciting securities transactions or offering advice. Registration Requirements for Firms The firm registration categories of dealer and adviser each have various sub-categories. A firm may be registered under more than one category. Dealer Categories Investment dealer an investment dealer may act as a dealer or an underwriter in respect of any security. Mutual fund dealer a mutual fund dealer may act as a dealer in respect of any security of: (i) a mutual fund; or (ii) an investment fund that is a labour-sponsored investment fund corporation or labour-sponsored venture capital corporation under the appropriate legislation. Scholarship plan dealer a scholarship plan dealer may act as a dealer in respect of a security of a scholarship plan, an educational plan or an educational trust. Exempt market dealer (or EMD ) an EMD may: (i) act as dealer by trading in a security that is distributed under an exemption from the prospectus requirement, whether or not a prospectus was filed in respect of the distribution; (ii) act as a dealer by trading a security that, if the trade were a distribution, would be exempt from the prospectus requirement; (iii) receive an order from a client to sell a security that was acquired by the client in a circumstances described above and may act or solicit in furtherance of receiving such an order; and (iv) act as an underwriter in respect of a distribution of securities that is made under and exemption from the prospectus requirement. Restricted dealer a restricted dealer may act as a dealer or an underwriter in accordance with the terms, conditions, restrictions or requirements applied to the registration. Advisor Categories Portfolio Manager a portfolio manager may act as an advisor in respect of any security. Restricted Portfolio Manager a restricted portfolio manager may act as an advisor in respect of any security in accordance with the terms, conditions, restrictions or requirements applied to the registration. Investment Fund Manager An investment fund manager may direct the business, operations or affairs of an investment fund, organize an investment fund and is generally responsible for the management and administration of an investment fund Doing Business In Canada: Securities and Corporate Finance

77 All registered firms have a registered Ultimate Designated Person ( UDP ) as the person who is in charge of the business (the president or Chief Executive Officer) and a Chief Compliance Officer ( CCO ) who is responsible for monitoring daily compliance with policies and procedures. Registered firms are subject to the numerous requirements set out in NI including minimum capital requirements, insurance requirements, know your client and know your product obligations, and financial reporting requirements. Permitted Activities A registered adviser who deals in securities of in-house pooled funds with advisor fully managed accounts is exempt from the dealer registration requirement. A registered dealer who provides non-discretionary advice in support of its dealing activities will be exempt from the adviser registration requirement. There is no requirement that the advising be incidental to a dealer s primary business. Members of Investment Industry Regulatory Organization of Canada ( IIROC ) who give discretionary advice to fully managed accounts are also exempt. Registration Requirements for Individuals Exam-based (rather than course-based) proficiency requirements have been prescribed for representatives of each category of dealer other than an investment dealer or a mutual fund dealer representative that is a member of IIROC or the Mutual Fund Dealers Association ( MFDA ), and for portfolio managers. Proficiency requirements are also prescribed for CCOs for each of the categories of registrants. A person acting as a dealing representative of an EMD must meet one of three proficiency requirements, similar to representatives of an investment dealer member of IIROC. An individual registering as an advising representative who hold a Chartered Financial Analyst ( CFA ) charter must have at least 12 months of investment management experience in the 36-month period prior to applying for registration. If a person has the Canadian Investment Manager ( CIM ) designation, on the other hand, he or she must have 48 months of investment management experience, at least 12 months of which was in the 36-month period prior to applying for registration. A person may be granted registration as an associate advising representative of a portfolio manager if he or she has completed any part of a requirement for an advising representative, for example, having earned a CFA charter. Dealer Registration Exemptions NI offers few dealer registration exemptions than previous regimes because NI is premised upon a business trigger instead of the trade trigger that existed in all provinces and territories other than Québec. Moreover, the introduction of an exempt market dealer registration category, in most jurisdictions, dramatically narrows the exempt market for unregistered market intermediaries. In the western jurisdictions and the three territories, market intermediaries are able to deal in the exempt market without registration in reliance upon certain prospectus exemptions subject to certain conditions (exempt market intermediaries). The dealer registration exemptions formerly contained in NI are repealed and replaced with the following exemptions: Trades Through a Registered Dealer This is an exemption to a person if the trade is made through an agent that is a registered dealer or made to a registered dealer that is purchasing as principal. Doing Business In Canada: Securities and Corporate Finance 14.12

78 Adviser Non-Prospectus Qualified Investment Fund This is an exemption to a registered adviser or an international adviser for a trade in a security in a non-prospectus qualified investment fund if: (i) the adviser acts as the investment fund s adviser and investment fund manager; and (ii) the trade is to a managed account of a client of the adviser. Investment Fund Reinvestment This is a limited exemption to an investment fund manager where: (i) distributions or dividends are used by securityholders to acquire securities of the same class or series of the investment fund; or (ii) a securityholder makes an optional cash payment and acquires securities of an investment fund that trade in a marketplace that are of the same class of series of securities referred to in (i), but securities subscribed with these cash payments in any financial year cannot exceed two per cent of the issued and outstanding securities of the class. Additional Investment in Investment Funds This is an exemption to an investment fund and its manager in connection with a distribution of securities to securityholders that have previously acquired securities of the investment fund for an acquisition cost of not less than $150,000 or hold securities having a net asset value of not less than $150,000. Private Investment Club This is an exemption for a trade in a security of an investment fund that: (i) has no more than 50 holders and requires contributions from them for funding; (ii) does not distribute its securities to or borrow money from the public; and (iii) pays no fees for investment management or administration advice other than brokerage fees. Private Investment Fund Loan and Trust Pools This is an exemption for a trade in an investment fund co-mingling money of different estates and trusts that is administered solely by the trust company. Mortgages This is an exemption to a person dealing in mortgages (other than, in certain jurisdictions, syndicated mortgages) who is licensed or exempt from licensing under mortgage brokerage laws. Personal Property Security Legislation This is an exemption to a person dealing in a security (other than to an individual) evidencing indebtedness secured under personal property legislation. Variable Insurance Contract This is an exemption to an insurance company dealing in: (i) a contract of group insurance; (ii) a whole life insurance contract providing for a payment at maturity of an amount not less than 75 per cent of the premium paid; (iii) an arrangement for the investment of policy dividends and policy proceeds; and (iv) a variable life annuity. Schedule III Banks and Cooperative Associations Evidence of Deposit This is an exemption to a person dealing in a deposit issued by a Schedule III bank or federal co-op. Plan Administrators This is an exemption for dealing in securities of an issuer by a trustee, custodian or administrator acting on behalf of employees, executives, directors and consultants of the issuer pursuant to a plan of the issuer Doing Business In Canada: Securities and Corporate Finance

79 Re-Investment Plan This is an exemption for dealing in securities of an issuer by the issuer or by a trustee, custodian or administrator acting for or on behalf of the issuer if the trades are made pursuant to a plan and dividends or distributions are applied to the purchase of the issuer s securities or a securityholder makes an optional cash payment to purchase the issuer s securities but securities subscribed with these cash payments cannot exceed, in any financial year, two per cent of the issued and outstanding securities of the relevant class or series. Self-Directed Registered Education Savings Plans ( RESPs ) This is an exemption for a trade in a self-directed RESP to a subscriber: (i) if the trade is made by: (a) a mutual fund dealer representative; (b) a Canadian financial institution; and (c) in Ontario, a financial intermediary; and (ii) the self-directed RESP restricts its investments in securities to securities that the person who trades the RESP is permitted to trade. Exchange Contracts This is an exemption for trades by a person in exchange contracts in British Columbia, Alberta, Saskatchewan and New Brunswick: (i) made solely through an agent that is a registered dealer or to a registered dealer purchasing as principal; or (ii) subject to specific conditions, resulting from an unsolicited order placed with an individual who is not a resident of and does not carry on business in the local jurisdiction. Specified Debt This is an exemption for a trade in specified government debt such as debt securities of the federal, provincial, territorial or municipal governments and of regulated financial institutions (if not subordinate in payment to deposits). Small Securityholder Arrangements This is an exemption for a trade by an issuer or an agent under the odd lot selling and purchase arrangements policy of the TSX or TSXV or a similar policy of a designated exchange. Non-Resident Dealers See International Dealer Exemption below. Adviser Registration Exemptions NI contains the following exemptions from the adviser registration requirement: Ancillary Advice by Dealers This is an exemption to a registered dealer and its representatives for advice in connection with a trade other than a trade for a managed account. IIROC Members with Discretionary Authority This is an exemption to a registered dealer that is an IIROC member and its representatives acting as an adviser in compliance with IIROC rules to a managed account. Advising Generally This is an exemption to a person that carries on an advisory business either directly or through publications if the advice is not tailored to needs of specific clients and applicable disclosure requirements are addressed. Doing Business In Canada: Securities and Corporate Finance 14.14

80 Non-Resident Advisers See International Adviser Exemption below. Mobility Exemptions NI sets out limited exemptions that permit a dealer or adviser to continue to service up to 10 (and each of its representatives, up to five) individual clients and certain family members of those clients that re-locate to a jurisdiction in which the dealer or adviser is not registered. International Dealer Exemption Under NI , a non-resident dealer is only permitted to trade with permitted clients, including: Regulated financial institutions. Registered dealers and advisers. Federal, provincial, territorial and municipal governments and crown corporations. Regulated pension funds. Accounts fully managed by a registered adviser. An investment fund managed by a registered investment fund manager or advised by a registered adviser. An individual with at least $5 million in net financial assets. A person (other than an individual or investment fund) with net assets of at least $25 million. Trades with permitted clients will generally be limited to trades involving: A debt security during the security s distribution if it is offered primarily in a foreign jurisdiction and if no prospectus is filed in Canada. A debt security that is a foreign security other than during the debt security s initial distribution period. A foreign security unless the trade is made during the security s distribution under a prospectus filed in Canada. If the permitted client is an investment dealer, a foreign security or any security if the investment dealer is acting as principal. A foreign security means a security of an issuer formed under the laws of a foreign jurisdiction or issued by a foreign government. The international dealer exemption from registration is only available to persons or companies that are registered to carry on the business of dealing in securities in their home (foreign) jurisdiction and engage in the business of a dealer in their home (foreign) jurisdiction. In order to rely on the exemption, the non-resident dealer will have to formally submit to the jurisdiction and appoint an agent for service. Before dealing with any permitted client, the non-resident dealer will also have to notify the client of its non-resident status and of the name and address of its agent for service in the relevant jurisdiction. The non-resident dealer must also provide the securities regulatory authority with an annual notification of its reliance on this exemption Doing Business In Canada: Securities and Corporate Finance

81 International Adviser Exemption Similar to the replacement of the international dealer category of registration with the international dealer exemption from registration, under the international adviser exemption that is now available in all jurisdictions a non-resident adviser may provide advice to permitted clients without having to become registered as adviser. The international adviser exemption from registration is only available to persons or companies that are registered to carry on and engage in the business of an adviser in their home (foreign) jurisdiction or operate under an exemption from registration in that jurisdiction. To rely on the exemption, the non-resident adviser must formally submit to the jurisdiction and appoint an agent for service. Before acting as adviser to any permitted client, the non-resident adviser will also have to notify the client of its non-resident status and the name and address of its agent for service in the relevant jurisdiction. The non-resident adviser must also provide the securities regulatory authority with an annual notification of its reliance on this exemption. The non-resident adviser cannot advise in Canada with respect of securities of Canadian issuers unless providing advice on securities of a Canadian issuer is incidental to providing advice on securities of a foreign issuer. In addition, not more than 10% of the aggregate consolidated gross revenue of the non-resident adviser and its unregistered affiliates for any financial year may be derived from portfolio management activities of the non-resident adviser, and its unregistered affiliates for any financial year may be derived from portfolio management activities of the non-resident adviser and its affiliates in Canada. Exempt Market Intermediaries The north and western jurisdictions (British Columbia, Alberta, Manitoba and the three territories) have issued orders exempting a person in the business of dealing in securities using certain prospectus exemptions from registering as an exempt market dealer. The market intermediary must deal only with persons who are: (i) accredited investors; (ii) family, friends and business associates; (iii) purchasers provided with a prescribed Offering Memorandum; or (iv) purchasers subscribing to a minimum of $150,000 of a security and who rely on the analogous prospectus exemption. To use any of these exemptions, a person must meet all of the following conditions: Not be otherwise registered in any jurisdiction; Not provide suitability advice leading to the trade; Except in British Columbia, not otherwise provide financial services to the purchaser; Not hold or have access to the purchaser s assets; Provide prescribed risk disclosure to the purchaser; and File an information report with the securities regulatory authority. Registration in Multiple Jurisdictions National Policy Process for Registration in Multiple Jurisdictions ( NP ) sets out the procedures for registering in more than one jurisdiction. Together Multilateral Instrument Passport System and NP establish a passport system for firms and individuals seeking registration in passport jurisdictions. Because Ontario has not adopted the passport Doing Business In Canada: Securities and Corporate Finance 14.16

82 system, NP creates an interface similar to the NRS for firms or individuals in passport jurisdictions seeking registration in Ontario as non-principal jurisdiction. For the purpose of NP , the principal regulator for a firm will usually be the regulator in the jurisdiction where the firm has its head office, and for an individual the regulator of the jurisdiction where the individual has his or her working office. Changes to Québec Regulatory Framework Changes to the Securities Act (Québec) ( QSA ) and An Act Respecting the Distribution of Financial Products and Services (Québec) ( Distribution Act ) moves the regulation of mutual fund dealers and scholarship plan dealers to the more flexible regulatory framework of the QSA from the Distribution Act. However, mutual fund dealers and scholarship plan dealers registered only in Québec will continue to be supervised by the AMF and not be required to become members of the MFDA. Any Québec-registered mutual fund dealer or scholarship plan dealer will be required to maintain prescribed professional insurance and contribute to the Québec-based indemnity fund, the Fonds d indemnisation des services financiers. Furthermore, their representatives will be required to be members of the Chambre de la sécurité financière Doing Business In Canada: Securities and Corporate Finance

83 Taxation How is Income Taxed in Canada? Harmonized Sales Tax Provincial Sales Taxes Tax Considerations regarding Canadian Mergers and Acquisitions There are several significant tax implications for companies carrying on business in Canada. Some of the primary tax considerations are described below. How is Income Taxed in Canada? Generally, Canada imposes income tax based on a person s residency. Persons who are resident in Canada within the meaning of the Income Tax Act ( the Act ) are liable for tax on their worldwide income. A person includes an individual, a corporation or trust. A partnership calculates its income as if it were a person, but the income (or loss) of a partnership is allocated among the partners for tax purposes and the partners are subject to tax thereon. Note that an individual may live outside Canada and still be resident in Canada for tax purposes. A person who is a non-resident of Canada is subject to Canadian tax on income or gains from a Canadian source, which includes a business carried on in Canada. The amount of Canadian income tax payable may be reduced or eliminated via a tax treaty that Canada has entered into with the non-resident person s country of residence. How do you Determine Residency for Tax Purposes? An individual is considered to be a resident of Canada if Canada is the place where that person regularly and customarily lives. Certain rules in the Act also deem an individual to be resident in Canada. A corporation is deemed to be resident in Canada if it was incorporated in Canada after April 26, 1965 or, if incorporated in Canada before that time, it was resident (or carried on business) in Canada at any time after that date. A corporation incorporated outside Canada is considered resident in Canada if its central mind and management are located in Canada. Doing Business In Canada: Taxation 15.1

84 Trusts are resident in the jurisdiction where the management and control of the trust takes place. A person (including a corporation) that would otherwise be considered to be resident in both Canada and another country under their respective domestic laws may be entitled to relief under the tie breaker rules contained in a tax treaty between Canada and the other country. What Constitutes Income from Carrying on Business in Canada? A non-resident is taxable on its income from carrying on business in Canada, subject to tax treaty relief. Case law considers a business to be anything which occupies the time and attention and labour for the purpose of profit. The Act defines a business to include a profession, calling, trade, manufacture or undertaking of any kind whatever, including an adventure or concern in the nature of trade. The Act also deems certain activities to constitute carrying on business in Canada. What Tax Applies to Income from Employment in Canada? A non-resident is taxable in Canada on income from employment duties performed in Canada, subject to tax treaty relief. Such income is taxed at graduated tax rates for individuals (see below). An employer, including a non-resident employer, paying salary to a non-resident for employment duties performed in Canada must withhold and remit to the Canada Revenue Agency ( CRA ) Canadian withholding taxes on the salary (unless a waiver has been obtained from the CRA). How are Gains from the Disposition of Taxable Canadian Property Taxed in Canada? A non-resident is taxable in Canada on capital gains from the disposition of taxable Canadian property, subject to the application of a tax treaty. In general terms, taxable Canadian property includes real property situated in Canada, assets used in a business carried on in Canada, and certain equity interests in corporations, partnerships and trusts that at any time in the prior 60 months have derived more than 50% of their fair market value from real property or resource properties situated in Canada. In some cases, a purchaser of taxable Canadian property from a non-resident vendor is required to withhold and remit 25% to 50% of the purchase price to the CRA unless the vendor obtains a clearance certificate indicating that any Canadian tax arising from the disposition has been paid. What Tax Rates Apply to Income Earned in Canada? Taxpayers are generally subject to tax at both the federal and provincial level. The calculation of an individual s federal income tax is based on a progressive system. Most provinces also have a progressive tax rate system. The combined (federal and provincial) top personal marginal tax rate for an individual (depending on the province) ranges from 39% to 50%. Dividends and capital gains receive favourable tax treatment. Most corporations that are taxable in Canada pay a flat rate (federal and provincial combined) of between 25% and 31% on active business income, depending on the province. Canadiancontrolled private corporations and corporations involved in manufacturing and processing receive favourable tax treatment. Some provinces also provide tax benefits for new businesses. Branch Tax In addition to the tax rates set out above, a branch tax of 25% (which may be reduced by a tax treaty) is generally levied on the after-tax business profits (less certain deductions) of a nonresident corporation carrying on business in Canada through a branch, rather than through a Canadian subsidiary corporation. Withholding Taxes on Amounts Paid to a Non-Resident for Services Performed in Canada The Act generally requires every person, including a non-resident, who pays a non-resident person a fee, commission or other amount in respect of services physically performed in Canada to withhold and remit 15% of such payment to the CRA Doing Business In Canada: Taxation

85 Withholding Taxes on Passive Income Paid by a Person Resident in Canada to a Non-Resident The Act requires a person resident in Canada to withhold and remit to the CRA 25% of the gross amount of certain payments to a non-resident, subject to tax treaty relief. The principal payments that may attract withholding tax include: Dividends, including dividends deemed to have been paid pursuant to the Act; Interest that is: (i) participating debt interest, or (ii) paid by a Canadian borrower who does not deal at arm s length with the non-resident lender; Management and administrative fees; and Royalties. Transfer Pricing Under the transfer pricing rules in the Act, the CRA may adjust a Canadian taxpayer s income and apply penalties if the Canadian and a non-arm s length non-resident person participate in a transaction the terms and conditions of which differ from those that would have been made between persons dealing at arm s length. Harmonized Sales Tax The provinces of Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland & Labrador (the Participating Provinces ) have combined the 5% federal goods and services tax ( GST ) and their respective provincial retail sales tax to form a harmonized sales tax ( HST ), with HST rates ranging from 13% to 15%. The federal government administers HST and then remits the appropriate amounts owing to the Participating Provinces. Generally, businesses that supply taxable or zero-rated goods and services can recover the GST/HST paid or payable on goods and services that were acquired in the course of their commercial activities by claiming input tax credits. The HST is effectively a tax on the end-users of a product or service. Provincial Sales Taxes Most of the non-hst provinces impose a retail sales tax (ranging from 5% to 8%) on personal property and certain services purchased for consumption rather than resale. Alberta does not impose a provincial sales tax, while Québec s 9.975% sales tax is similar to the federal GST. Tax Considerations regarding Canadian Mergers and Acquisitions There are several Canadian federal income tax considerations applicable to mergers and acquisitions: Non-Resident Purchaser Income Tax Considerations It is generally favourable for a non-resident to establish a Canadian acquisition corporation to effect the acquisition. Where a Canadian acquisition corporation is a direct purchaser of a Canadian target: (1) there may be more cross-border paid-up capital to be repatriated free of Canadian withholding tax; (2) the transaction may qualify for a tax-free rollover if there is share consideration payable to the vendors; and (3) it may be possible to invoke the bump rules to permit a step-up in the tax cost of qualified property up to fair market value at the time of acquisition of control. A non-resident purchaser should also consider any applicable tax treaty benefits when selecting the entity to make the investment into Canada. Doing Business In Canada: Taxation 15.3

86 The most tax efficient (internal and/or external) financing of the purchase must be considered, particularly if a significant amount of cash is part of the purchase price. Generally, a Canadian acquisition corporation, as borrower, would amalgamate with the Canadian target so that the interest expense would offset the target s income. The amalgamation of two or more taxable Canadian corporations can occur on a tax-deferred basis. Withholding tax must be considered if there is a non-resident lender. A non-resident purchaser should also consider the potential application of certain rules in the Act affecting international tax structures which could lead to unfavourable consequences, including rules dealing with the following: Thin capitalization Surplus stripping Foreign affiliate dumping Upstream loans from foreign affiliates A new rule proposed in the 2014 Budget that is intended to prevent the inappropriate use of Canada s tax treaties ( treaty shopping ) will need to be considered in designing an acquisition structure. If the target has foreign subsidiaries, Canadian and foreign tax considerations may apply to the purchaser, including the controlled foreign corporation rules in the Act. Note that there are potential adverse tax implications for a purchaser who accommodates a full or partial tax-free rollover where the consideration wholly or partly consists of its shares, such as reductions in the tax cost of purchased shares or assets and the amount of cross-border paid-up capital that might otherwise result from a transaction that does not occur on a rollover basis. A non-resident purchaser should consider the tax attributes and the special status of any outstanding shares of the target. Any post-closing integration and restructuring issues will have tax considerations and associated costs. Vendor Income Tax Considerations A vendor who is a non-resident of Canada must consider the tax consequences of a sale transaction in its home jurisdiction and under the Act. For example, a transaction such as a share-for-share exchange that qualifies for tax-deferred treatment in Canada may not so qualify in the vendor s country of residence. As discussed above, a non-resident vendor is generally not subject to Canadian income tax on a capital gain realized on a disposition of property unless the property is taxable Canadian property of the vendor. It may be possible for a vendor to engage in a pre-closing transaction that reduces the amount of Canadian tax that would otherwise be payable. For example, the payment of a tax-free dividend to (or the creation of a deemed dividend for) a Canadian corporate shareholder of a target pre-closing may reduce the capital gain realized by the vendor on the sale of the target. Vendors must also consider the impact of the acquisition on existing employee bonus, retirement and equity compensation plans. Target Income Tax Considerations Where there is an acquisition of control of the corporation, the Act applies rules ranging from tax compliance to more substantive provisions. A target that is a Canadian-controlled private corporation prior to the sale may lose this status, resulting in the target s loss of refundable tax credits and the small business deduction Doing Business In Canada: Taxation

87 Consumer Protection Types of Consumer Agreements Gift Cards Disclosure Requirements Cost of Credit Disclosure Prepayment Default Charges Unfair Practices Unsolicited Goods and Services Consumer Sales Warranties Offences and Penalties Each of the Canadian provinces and territories have consumer protection laws governing transactions with consumers. The legislation applies, subject to specified exemptions, to a variety of consumer transactions and agreements including credit agreements, lease agreements and internet agreements. Though there are often many similarities, consumer protection legislation is not harmonized in Canada. Accordingly, it is important when engaging in a consumer transaction to be cognizant of the laws of the respective Canadian jurisdiction. Types of Consumer Agreements In most instances, Canadian consumer protection legislation categorizes consumer agreements by type. In Ontario, consumer agreements include internet agreements, future performance agreements, direct agreements, time share agreements, lease agreements and credit agreements. The other provinces may use different terminology, but generally have the same categorization (e.g. a distance sales agreement is an internet agreement). Under the Ontario legislation, an agreement can be categorized as more than one type; for example, a lease agreement may also be a future performance agreement and a direct agreement. Due to certain overlap rules in the Ontario legislation, such an agreement is subject to exemptions from certain disclosure required under the Ontario legislation. Credit agreements are further categorized as either fixed credit or open or variable credit. An open or variable credit agreement provides multiple advances in unspecified amounts, and may also impose a credit limit (i.e., a credit card or line of credit). A fixed credit agreement is one that is not open credit (e.g., specifies the amount of the advance to be made). Doing Business In Canada: Consumer Protection 16.1